Okay, thank you very much, and welcome here for Scandinavian Tobacco Group's Second Capital Markets Day. It's a pleasure to have this occasion taking place once again at the Ned Hotel in London. This is a very unique place, as you have probably realized this is the old headquarters of British Midland Bank, and the actual room that we are located in here is the old boardroom. Very unique. First of all, I have to introduce myself. I'm Torben Sand. I'm heading Investor Relations and Group Communication of Scandinavian Tobacco Group. Also, welcome to all of you that is following on live stream.
It's good to have you on board, and we hope we are going to make this next 3.5-hour both enjoyable, but also to give you some insights into our company. First, I have to unfortunately announce that Marianne, our CFO, will not be able to participate today. She is knocked down with pneumonia, and that of course is what happens when we have these kind of live stream events. But I will try to the best I can to be stand in for her during her part of the presentation. And then any practical questions, practicalities that you might have, we have both my colleague Eliza and Victoria sitting over here that will be more than happy to help you out.
And with this, let's take a look at the agenda. First of all, the idea about the Capital Markets Day is basically to give you some insights to our unique company. We believe we are positioned in unique sectors, but we also believe that we have a unique role to play in the sectors where we operate. That is what we aim to dig more into during the day. We'll start off by giving you some insights about who we are as a company, about our transformation, what we have been doing the past five-to-seven years since our listing back in 2016. And then we'll touch a little bit about the equity story that we believe that we can supply for you as stakeholders and investors in the company.
In the second section, we'll dig more into our consumers. It's one of the areas where I sense that we are not talking too much about it under our normal dialogue with the financial markets. I think it could be very valuable to give a little more insights to who are our consumers, what is driving their enjoyment of consuming our products, and how do we see this play out going forward? Finally, section three, that's about the value proposition.
We, of course, also want to demonstrate for you how we are going to connect all the dots throughout our operations, what we do with adding value through M&A, which is absolutely critical, and then, of course, how we see the future for our core business, but also our Growth Enablers that we have talked a little bit about in the recent few quarters. We will end the day with a social event for those of you present here in London, where our brand ambassador for the Cohiba brand, Sean Williams, he will be more than happy to talk a little bit about our fine products and show you some of the details of enjoying a good cigar and pairing actually with a good whiskey. Okay, let's get started.
But before doing so, let me just shortly introduce our management team, where all will have their part to play during the day. You know most of them, probably, our CEO, Niels Frederiksen, and CFO, Marianne Bock, and then we have our leaders from our commercial divisions, Régis Broersma and Sarah Santos, together with Jurjan Klep, and they will play the role during the second session of our Capital Markets Day. And then the two we also have in our executive board, that is, Yulia Lyusina, and we also have Jesper Madsen, our relatively new man on our operations side. We will, of course, during the day, have and give you lots of opportunities to ask questions.
We will have short Q&As in between the sections, and, I will urge you to, focus on the actual section that we are, showcasing. And then we will wait with the questions, maybe about the current trading, to the final section, where we also will give you ample of opportunities to ask questions. During the Q&A session, I will ask you to wait for the microphones because we are live streamed, so of course, also to give them the best possible quality and being able to hear your questions. Please do wait for that. Okay, let's get started. Our unique company, section one. We have three blocks here. First of all, who we are, but also what kind of a transformation we have been through as a company. And then the third part, that is the equity story.
Enough for now, and I think I will welcome Niels for starting off.
Thank you, Torben, and welcome to everyone here in London and everyone on the live stream. My name is Niels Frederiksen. I've been the CEO of Scandinavian Tobacco Group since 2015. As you know, Scandinavian Tobacco Group is an ambitious company, and our vision is to become the undisputed and sustainable global leader in cigars, and we are well underway to achieve that vision. We are already the number one player in handmade cigars in the U.S., and the U.S. is by far the largest handmade cigar market in the world, and outside the U.S., we are number one in machine-rolled cigars. We use our strong cash flows and balance sheet to acquire, to grow through acquisitions, and we return significant amounts of money to our shareholders.
Within the last five years alone, we have returned almost DKK 5 billion to our shareholders. In addition to acquisitions, we invest in our Growth Enablers, which are retail expansion in the handmade cigar market in the U.S. It is the continued growth of handmade cigars outside the U.S., and more recently, our narrow portfolio of next-generation products. So Scandinavian Tobacco Group is a business that is all about occasion and rituals, which are two very powerful elements of human life. We strive to understand these as well as we can, so that we can develop brands and smoking experiences that resonate well with our consumers, and that is why our purpose is simple, yet meaningful. We craft rituals that make us more.
Let's start today's session by taking a closer look at how we think slightly different across in terms of operating model across our various businesses. In handmade cigars, we believe that long-term success will be based on engaging actively across the entire value chain, from growing tobacco to selling our products to consumers via online and regular retail. In handmade cigars, consumers are very engaged, not only with the brand they smoke, but also with where the tobacco is grown, how it's fermented, and who has blended the cigar. By engaging in activities across the value chain, Scandinavian Tobacco Group can understand consumers even better and influence them towards our brands. So when we think about our handmade cigar business, our aim is to optimize our share of the value chain.
In the mass market categories, we still invest a significant amount of money in understanding or being the cigar specialist and creating great smoking experiences. But our focus is really around building the strongest possible portfolio of brands, and here our goal is to optimize our market share within the various segments where we compete. Now, let's take a look at how Scandinavian Tobacco Group is organized across our commercial divisions. Our direct-to-consumer activities are organized in the North America Online and Retail division. This division operates six distinct online platforms, each targeted toward a specific consumer segment. This division is also responsible for our growing engagement in regular retail through our superstores.
North America Online sells our own national brands, but also the private labels that the online business have developed themselves, as well as a selection of third-party brands that we believe are relevant for our trade channels. The North America Branded and Rest of W orld division contains our national handmade cigar brands in the U.S., such as Cohiba, Macanudo, and CAO, as well as mass market products across the U.S., Canada, and many, many export markets. Europe Branded contains all remaining subsidiaries, with a primary focus on Europe, and some of the larger markets in this cluster is France, U.K., Benelux, Spain, Italy, and Germany, and then, of course, our heritage strongholds in Denmark and Sweden.
This commercial structure was established back in 2019 and has provided us with the ability to focus on what was important to win in each area and to react quickly to market developments. Let's take a look at Scandinavian Tobacco Group's strong brand portfolio. Now, Scandinavian Tobacco Group is a consumer-led company, and our brands are strong assets targeted towards specific consumer segments. Some of our brands are global, but many are regional brands and even local heroes. In combination, they represent our leadership position across these categories. In the handmade cigar category, we have strong global brands such as Macanudo, CAO, and Alec Bradley. While for some of these brands, we only own the trademarks in the U.S., and examples of this are Cohiba, Punch, and Partagás.
In machine-rolled cigars, we have a wide portfolio of brands representing our strong position outside the U.S., and in pipe tobacco, where we are a global leader with more than 50% market shares, we also have a wide variety of strong brands. Whereas in our fine-cut business, where we really only focus on five to seven markets globally, we have mostly local heroes. And finally, we are slowly building a portfolio of brands in the other, or in the oral product space with XQS, with STRÖM, and [Act], and in the U.S. also a hemp-based smoke called Versa. When you look at our position across especially cigars and pipe tobacco, this also means that we have brands representing everything from value to super premium. Let's now turn to take a look at our strategy Rolling Towards 2025.
Now, our goal is to build a bigger company with strong margins and outstanding cash generation. We've made good progress against this ambition, but we've also seen that it's not a straight line. We have seen periods of faster growth, and we've also seen periods of decline. However, over time, Scandinavian Tobacco Group have been able to develop the company despite difficult market conditions. Our strategy and our Must Win Battles represent a deep understanding of what it takes to win in cigars globally, and the different roles that each segment play in this business. We know that acquisitions are important to retain and build scale in a declining industry, and we also know that we must be disciplined both in buying and integrating these companies. On top, we keep standardizing and simplifying our business to drive cost efficiency.
As we transform and professionalize the business, we build new capabilities. We digitalize, and we build a performance culture that can deal with both the periods where we grow faster because of acquisitions, but also the periods where we must be more tactical and agile because our net sales is flat. We see significant changes to underlying consumer behavior as next generation products are being launched into more and more markets, and STG is not immune to this development. Our response has been to create a growth incubator, and the first products from this growth incubator has been the white nicotine pouches that we've launched in a number of markets. We will revert to this later today, but now let's take a look at our sustainability efforts.
Over the past two years, Scandinavian Tobacco Group has strengthened its efforts in the sustainability area and created an updated and enhanced agenda, which we call Rolling Responsibly. Our priorities are anchored around two key priorities: carbon reduction and community pioneers. We are making good progress on our carbon reduction commitments, and we are working to find the best ways in which we can engage with communities where many of our local factories are located, and these initiatives will most likely be in the areas of health, education, and women's enablement, all areas that resonate well with our consumers, but also with many internal STG stakeholders. Our priorities in the sustainability area in 2023 has been three things. One, embed sustainability into our key business processes. Secondly, reaching our commitments on climate. And thirdly, being prepared and ready for the Corporate Sustainability Directive, called the CSRD.
I'm very pleased to see that we are well underway with making progress across all these areas, and I look forward to updating you further as we go into 2024. Let me now turn to the transformation journey that STG is on. Our vision is to become the undisputed and sustainable global leader in cigars, and that must be anchored in an outstanding brand portfolio, strong consumer insights, and the ability to navigate difficult and regulated markets. However, we must also become the most cost-efficient and professional cigar company in the industry. Nobody should be able to operate a cigar business at higher margins than we can. Nobody should be better at buying and integrating companies than us, and nobody should be better at working capital and cash generation, cash flow generation than we are.
That vision and that motivation is what drives the development of Scandinavian Tobacco Group and involves, among other things, our investments in one global SAP HANA solution, new digital platforms for B2B and B2C, and also the investment we made in 2022 in consolidating our combined U.S. distribution activities into a state-of-the-art distribution center in Bethlehem, Pennsylvania. Now, delivering growth in net sales is a large challenge for most tobacco companies. For Scandinavian Tobacco Group, growth will come from mergers and acquisitions and from our investments in Growth Enablers. These are the pockets of our business where we see the highest growth potential and where we believe we have a right to compete and win.
Now, I'll turn the floor back to Torben, who will provide you a quick update on the status of our Rolling Towards 2025 strategy and our long-term financial performance. Here you are, Torben.
Thank you, Niels. Yes, as Niels just has alluded to, we have a five-year strategy, and we are now halfway through. So, it's always a good time to reflect, how have we progressed and where are we actually now with the strategy? We have these six Must Win Battles that Niels just shortly addressed. Let me walk through each of them very shortly. First of all, we have our Must Win Battle to grow our handmade cigar business. Throughout the past 2.5 years, we have acquired two new brands to our portfolio. We have acquired Alec Bradley, and we have also acquired the boutique brand Room101, both in the U.S.
Actually, we have just also acquired a small, another boutique brand to our online and retail business called La Perla Habana, so we continue to develop in that area. When it comes to our retail store expansion, we have opened up six new stores, so now we are counting 10 total. We have opened these stores in Texas and Florida, so also here we are making good progress. Thirdly, when it comes to growing our international sales of handmade cigars, we have seen that we have continued to grow double-digit from the net sales point of view each and every year, and we expect to continue to do so. So I think we can say we have delivered in this Must Win Battle. When it comes to our machine-rolled cigar business, it's about growing our profits.
And we have, of course, with the addition of Agio to our portfolio, of course, we have delivered a substantial lift up in the total profit pool out of that part of the business. But we have also delivered a lot of price improvements and increases in order to, in order to counter the volume decline rates that we have seen in the markets in Europe. But it's also clear that, through our consumer insights and all our actions that is required, we need to move on in order to protect the profit pool in this part of the business, and we intend to do so. When it comes to the third Must Win Battle, that's M&A, Mergers and Acquisition. You all know that we have been more or less born out of mergers and acquisitions. We've been doing this many years.
But just in the past few years, we have acquired Agio Cigars. That was a major acquisition for us. But we have also acquired within the machine-rolled cigar business, MOSI in Italy. We have acquired, just as I said, Alec Bradley and Room101 in the U.S. handmade cigar market, and now we have also acquired one company in the, or brand in the nicotine pouch market, XQS, out of Sweden. So also here we have been quite active. When it comes to simplification, to simplify everything we do, we have, as Niels also talked shortly about, we have the investment in our new ERP system. We call it One Process internally, but that's a major rollout that we are ongoing right now.
We have invested in the new AutoStore facility in our U.S. online business, and we are ongoing looking for SKU rationalizations throughout our organization. So on simplification, it's an ongoing effort that we are delivering on here. Then on sustainability, Niels alluded to it. I'm not going to further give you details to this, but of course, also here we believe that we have made strong progress since 2020. And then finally, on our performance culture, it's also an ongoing effort for us to improve our project management efforts in order to prioritize everything we do, but it's also about implementing a performance culture where we have the right incentive systems in place, and we have also delivered on that. So how has this then materialized into financial numbers? Let's take a short look on this.
If we look at the, first of all, the net sales part, we can say that the net sales has grown by the acquisition and to a lesser extent, by organic measures. But we are now almost touching DKK 9 billion in net sales, where just a couple of years ago we were below DKK 7 billion. When it comes to our profitability aim, we have also improved here. Back in 2019, we were around slightly above 20%, and now we are basically guiding for a level of 24% for this year. All of that, of course, when we sum it up, that, delivers an improved EBITDA level, profit level out of the company. And then we have the cash flow, where we have, delivered throughout the years, I would say, a stable, constant, healthy cash flow above, well above DKK 1 billion.
And some of you might recall that we still see that the underlying structural cash flow generation, if we are not making major acquisitions or investments, that's still around DKK 1.5 billion. So I would say all of this is of course driven by the transformation we have been through as a company throughout the strategy, but transformation is a key word here. So, I think it's time to take maybe a deeper look into transformation, and I'll leave the word to Yulia.
Thank you, Torben, and good afternoon to everybody in the room and also on the call. My name is Yulia Lyusina, and I'm responsible for strategy, transformation, and sustainability. As Torben said, STG is on a transformation journey, and this transformation is anchored in six core elements. First of all, it is about consumer centricity. We recognize that our consumers and customers are the foundation of our business, and we need to understand much better their preferences, their needs, and what kind of experiences they would like to have. That's why we are continuously fine-tuning our business, and whenever we deliver our services or we design our processes, we always aim to have the end consumer in mind. Secondly, it is about data and analytics, and in the world full of data, we are harnessing the power of insights, analytics, and data-driven decision-making.
This might sound a little straightforward because, you know, you can say every consumer company will do so. But we are confident that in our industry, cigars, we are quite special, and STG is one of the most professional players in the market. We have the most extensive and unique set of insights about categories, markets, and consumers. We continue to invest in the data and capabilities in order to ensure that we understand the dynamics of our markets, we can anticipate the trends, and we can also take decisions that create value both for the short term and for the long term. Digital transformation, as Nils also mentioned, as well as Torben, this is another element of our evolution, and we are investing and integrating digital and technologies in different areas of our business. We think about digital in two ways.
First, it is the hardcore digital systems like ERP, that help us standardize and improve efficiencies in our processes. But secondly, it is the technologies that are more on the forefront, like e-commerce platforms, predictive engines, AI, and various tools that allow us to do advanced analytics. STG leverages both types of digital technologies. To support our ambitious goals, we are also investing in upskilling our workforce, and we are also developing end-to-end processes. We are also simplifying the processes in order to improve efficiencies, but also increase the speed to market and improve our scalability. For example, in our North America online and retail business, we are investing in digital, but we are also harnessing insights about new categories. Speaking about sustainability, we are also embedding sustainable practices into the ways we work.
We have an ambition that sustainability should be an integral part of how we do business, how we hire and promote people, how we do projects and M&A, how we develop our products portfolio. This is a very important agenda for us, and we are making good progress there. And then finally, we are fostering performance culture. We set the standards high for ourselves, we follow through on the process, and then we also aim to deliver results. Now, if you ask us today, where is STG on this transformation? I would say that we are in the middle of it. We are not there yet, but we understand what kind of company we want to be, and we are taking action to get there. Now, let me add a few words on what this actually means for us, what this transformation means for STG.
And we are changing in a number of ways. First of all, it is about our growth agenda, because we are shifting focus from very much focusing on the core to a broader growth agenda, core plus new categories. We are also moving from product focus to becoming more consumer-centric and customer-centric. And then from a more operational standpoint, we are moving from being a fragmented local organization to a global company with global processes and capabilities. And this means an internal shift for ourselves, but also it has profound implications on how we interact with the market and with consumers, customers, suppliers, and partners. And we realize that this transformation will take some time, it will not be easy, and we anticipate that there might be some challenges and setbacks on our way, but we are ready to take it with resilience and action.
Here, I will actually hand back to Torben, who will talk about how this all ties into the equity story and our shareholder value.
Thank you, Yulia. So, t hat's the starting point. We believe that we have a very strong portfolio of brands. Then we have market-leading positions. If we look at our. Okay, I hope this goes through then. Yep, okay. And then of course, after our brands and the focus on consumers, of course, we do have market-leading positions in the markets where we operate. Niels just alluded to our number one positions in handmade cigars in the U.S., but also, when it comes to machine-rolled cigars in Europe, we have number one or two positions in many markets. When it then comes to creating value, of course, also that is centered around a strong strategy. Our strategy is well-defined. Niels talked also about that in detail.
And that, of course, is the center of everything we do in these years, and that will also be the case going forward. We try to create value in everything we do. We are very occupied with delivering value for our shareholders, of course, but also all other stakeholders in the company. We believe that we have a clear path to do that. Julia is just going to talk a little more about our acquisition strategies in section three, so we'll get back to that. It's also about generally delivering results. Let's take a look at the results. We have seen some of the operational results just shortly, but here we have focused a little more on what is more shareholder-focused KPIs.
We have improved the adjusted earnings per share quite substantially, we believe, in the past few years. We are now, as with the guidance for 2023, targeting something between DKK 14-DKK 16 a share. That's a true lift up. All of that, with the financial results and the cash flow, of course, is then embedded into what we deliver of capital distribution. I'll come back to our financial policy later, but here you can see that we basically have constantly distributed lots of cash back to our shareholders, either in the form of dividends, and if you look at 2017, that was an extraordinary dividend that was paid out that particular year. Since then, I hope we are here. Yeah. With a steady financial track record. Sorry about that.
But then, if we look at the capital allocation, we have, since 2020, used share buybacks as the primary tool to distribute any excess capital that was available on our books, and we also intend to continue doing so. And then finally, ROIC, the return on invested capital, is of course also very important to look at. It's not only about expanding profits, but it's also about having a capital efficiency in our balance sheet that is as optimal as possible. But let's also then take a look at our revenue streams, because I think part of the explanation for how we see our company is also about how we divide our revenues.
Niels talked about our commercial reporting, and we have these three divisions that we report on: North American Online Retail, North American Branded Rest of World, and Europe Branded. Each of those are about one third of the company. We're also talking about the different kind of product categories. If we look at it that way, we will actually see that cigars are almost three-quarters of our company, where we have about 35% in handmade cigars and about 35%, slightly more, in machine-rolled cigars. We have smoking tobacco, and smoking tobacco, that is, pipe tobacco and fine cut. That's about another 13-14%. We have some accessories and other, which is another about 13%. I think we have a very well-diversified portfolio.
Then we have finally shown for the first time, this split into our Growth Enablers. So, you know the Growth Enablers, that is, our international sales of handmade cigars. It's our next generation product portfolio, but it's also our retail expansion. This is the 2022 number. It was 5% of the portfolio. As we speak, in the third quarter, it has increased to 8%. Another very important part of our equity story, that is, of course, the acquisition side. As I said, Yulia will come back and talk a little more into it, but I think it's important to understand that, what we are as a company is based out of mergers and acquisitions. It was about the first merger back in 2010, where we merged the cigar and pipe activities and Swedish Match with Scandinavian Tobacco.
That created the core of the company. But since then, we have made multiple of acquisitions, as we have talked about. So expanding the total net sales from DKK 2.4 billion back in 2010 to now almost DKK 9 billion, that's of course a step forward. And then when it comes to optimizing shareholder value, it's about capital efficiency, as we talked about. That's about how we return on the invested capital, and this is an average number that you can see in the slide of 10.2%, but we are right now up at more than 14%. So we have improved in this matter. But when it comes to capital allocation, shareholder returns is of course, about what we return, as I just said, but it's also about the total shareholder return.
There we have for the past five years, and that's with the current trading, we have delivered 8% per year, on average. We also, of course, believe that the sustainability is important for creating value. It is important that we also have an eye and that we improve on these metrics. They have become increasingly important also for the financial market. Here we have included a few of the key KPIs that we are looking at. Water withdrawal has declined with 6% since the baseline back in 2020, and the scope one and two emissions has declined with almost 19%. I think it's fair to say that we have made some good progress also here. With this, I will basically now leave the floor for some questions.
We would have at least 10 minutes for it, and again, I would urge if there's anybody in the room, please raise your hand, and there will be a microphone available for you. For all of you on the live stream, you can scan the QR code and ask any question that you might have that relates to what we've just talked about. Anybody that wants to start with a question? Jerry?
You talked about in one of the sessions, the scale of your business relative to some of your peers, providing valuable insights, consumer insights, and better analytics than other companies have. Could you give us some examples of that and how you've been able to leverage those to do better than the competition?
I think I'll leave that to you, Niels.
Thank you. Do we all need to use this one? No. So I would say that one area which has been a particular focus for us for a period, has been pricing. So, I think we've talked about it before, and we'll talk about it again, that for any tobacco company, pricing is, is critical. And what we have been trying to do, is to build our pricing capability over a number of periods, and the pricing capability really falls into two areas. One is a detailed understanding of price elasticities relative to, competition and how we can, translate this into different pricing policies for different brands in our portfolio, and that we are doing. So that's concrete examples. Another example, which I myself find, simple yet fascinating, is that in our online business, we have 20,000 SKUs.
When you have to update pricing of 20,000 SKUs, it's a significant piece of work, and we have recently implemented a new pricing tool that allows us to, you know, update and make pricing decisions much faster than we did in the past. There are lots of little things that we do. Of course, you can say that, you know, any pricing capability will not safeguard you against a competitor dumping a price, but at least it provides a strong foundation for making good pricing decisions.
Thank you, I think we'll take one from the live stream. This is one for you, I think also, Niels. You say you aim to be the undisputed global leader in cigars. Who is the current global leader, and how significant is the gap to you?
Yeah, I think it's a good and fair question. I think we may already be the global leader in cigars. There's probably no other company in the cigar industry that has our unique focus on this category and also the width and breadth of our portfolio and our geographic coverage. When we talk about being undisputed global and sustainable leaders in cigars, it is because we have pockets of our business where we are not strong in cigars. We want, and we'll talk more about it today, we want to be a much bigger player in handmade cigars outside the U.S. We also want, you know, to build our machine-rolled cigar business so that it has a bigger and more global platform.
What people often forget is that maybe only 85%-90% of cigars is consumed, and that, that 85%-90% is consumed in North America, Europe, and Australia, New Zealand. The rest of the world don't yet have, let's say, a strong tradition for smoking cigars, and we think, especially for handmade cigars, that's a big potential. We want to be so much bigger than number two, that nobody really questions that we are the, the, the leading player in the industry. That's what we are aiming to do.
I think now this is about the strategy, Niels, I think you will also take the next question here. What are your actual plans for risk-reduced products and M&A?
Yeah. We'll come back and talk a little bit more about this later today, but we are approaching the reduced harm area or the next generation products carefully. You can see that the first initiatives we made were own developed products that we launched into a few select markets. Then we decided to acquire XQS. XQS is an example of a small company with significant growth rates in one geographic market. It was not easy for them to bring this brand to become even bigger in Sweden, in this particular case, and it was impossible to bring it outside of Sweden. We can add value, we think, to a company like that, and that is what we will be looking for. We are not...
If we look at any more, let's say, reduced risk acquisitions, we will be looking at things where people have achieved something that is valuable and where we think we can add value on top. That's really important for us when we look at these areas.
Okay, thank you. Any more questions here from the room? Yeah, Jerry, go ahead.
I think you said at one stage, you're sort of halfway through your transformation to, to Rolling Towards 2025, and you said you were halfway through that. Could you talk a little bit about what is the next biggest milestone that you, you've to achieve that could make a difference to the business?
Yeah. I think that, obviously, you can say that we always like to do transactions, but really what we are spending a lot of efforts on doing at the moment is creating a much more scalable global platform, and there is no project larger for us than what we call One Process, which is the implementation of a, you know, a global platform of ERP. The reason this is a significant transformation for us as a group is because it's also driving, you know, a global operating model based on standardized processes, you know, standardized master data, all of the things you are familiar with, which is so easy to talk about, but so difficult to implement.
When we have implemented it, I think we, as a company, would be in a totally different place where we can also again raise our ambitions. I think a lot of what we're doing when we talk about our transformation journey is about, let's say, gaining appetite for more risk or being ready to take on bigger tasks. This is where what is important. That is the single, you know, biggest thing we are occupied with at the moment, getting our ERP system implemented on time, in full, and without too many disruptions.
Thank you. We can just have one more question. There is one from the live stream, once again, from Niklas, Carnegie. What is your key priority in terms of M&A? You're very strong in the premium segment in Europe, but lacking in value. Do you want to expand in value through acquisitions?
Well, I think that, as I said before, when you look at our mass market products, and especially machine-rolled cigars, we are occupied with building the strongest possible brand portfolio. Whenever we look at acquisition, we look for brands first. You can say that it's also natural to look at markets where we have relatively weaker positions, and that will also be a priority. This could be markets like Germany or even Italy. We also would be buying any meaningful volume that we can get in the market. This is a business that is super depending on volume, and if we can buy volume, and it doesn't have to be high price, as long as we can acquire it at a reasonable price, we would look at that as well.
Okay. Thank you, Niels. I think I will not leave you completely now because now we will start over with section two. If I can get this to work here. Section two now is what also is the core of the Capital Markets today, today, is about our consumers, our products. We'll start off by a short introduction by Niels of our core values and how that connects to consumers. Here you go, Niels. Oh, yeah.
Thank you, Torben. Let me maybe start by saying that Scandinavian Tobacco Group is a 250-year-old company. Over the years, responsibility and integrity have been cornerstones in how we operate the business. We are a strongly value-driven company, and we understand that being active in the tobacco industry comes with obligations to society, to employees, to customers, and to shareholders. These values that we'll come back and talk about are really the expected behaviors that we are anchoring in our code of conduct, in our marketing principles, and in our group values. I will start by talking about how our brands interact with our consumers and the role that craftsmanship and passion plays, in particular in our industry.
Now, one of the key things that hold us together as a company is our passion for tobacco, for consumers, and for the industry. We care about where the tobacco is grown, we care about where it's harvested and where it's fermented, and we combine it to create outstanding smoking experiences. We care really about all the little things that make smoking a cigar a very pleasant and sustainable ritual. When I smoke a handmade cigar, it's not just about picking up the first and the best cigar. It is about making the decision to smoke a cigar on a certain occasion. It is about walking over to the humidor to inspect the assortment of cigars that I happen to have in my humidor at that point in time. It's also about picking up a specific cigar.
It's about smelling it. It's about bringing it over to the place where I decided to sit down and enjoy it. It's also about carefully looking at the band of the cigar brand that I've chosen to smoke, and it's about reflecting on why I chose this particular cigar. Of course, it's about cutting the cigar, it's about firing it up, and it's about sitting back in your chair and enjoying the first puff. This is about passion, this is about quality of life. It's also often about the social interaction that cuts across social classes that is so often associated with the smoking of handmade cigars. We smoke because we've chosen to smoke, knowing well that any tobacco product is associated with risk. Now, few products entail more human touches, and more craftsmanship than the making of a handmade cigar.
When you see this next video and listen to Joel Gelin talk about the category, you will appreciate just how much passion means to us. Joel has been with Scandinavian Tobacco Group for decades and is an excellent ambassador for both the company and for the industry.
Cigar is part of, is, is part of my DNA, DNA. I've been working for cigar for the, over the last 30 year. Cigar is a passion, a cigar is a gathering, cigar is a sharing, cigar is getting to know good people. Cigar is like a celebration, that's why cigar is so important in my life. My family live from the cigar business, and also I support them for the cigar business. I don't see me in any other industry besides cigar, because cigar is in my DNA, DNA. I love it.
Okay. Thank you to Joel. Now, let's move on and talk a little bit about the core values that guide how we run the company and outline the behavior that we expect from employees and leaders alike. First, we empower with passion because Scandinavian Tobacco Group is around passion and pride. We put it into making great smoking experiences and for our consumers, and we care about every single aspect of the value chain. We try to blend our strengths because when we combine our knowledge and our skills, we can ensure consistency across products and brands, and we can also create relevant innovations and deliver even stronger corporate performance. We want to be curious as a company, we also want to be courageous, and we want to be good at operating our company in a smart and simplified way.
Finally, we try to light the way forward because we want to lead and steer the industry towards a sustainable future, and where we recognize our obligation to both society, customers, employees, and shareholders. We are a value-driven company, and we insist on behaving responsibly and with integrity. Let me now talk a little bit about our consumers and the regulation. Scandinavian Tobacco Group prioritizes compliance and behaving correctly with our adult consumer base. For our core business, this has not been an issue for quite a long time, as these categories have a very adult consumer base. For many of the next generation products, we are fully aware that the youth aspect of consumption is a concern. We are confident that we will be a good owner and marketeer of these product categories because we want to get it right.
Scandinavian Tobacco Group has an extensive and in-depth experience in dealing with and adapting to new regulation. Our success in this area is based on an in-depth understanding of both existing and potential regulation, and a strong track record for adapting across our value chain to any new legislation that is being passed. That makes us a trusted advisor with our partners, and it also is important to understand that these partners, sorry, are often equally affected by new regulation, and they are looking to us for guidance and advice on how to deal with new regulation. I will not go into detail with any of the current legislation, but you are, of course, more than welcome to ask questions later on, and we'll be happy to answer them. We will now turn to our section on consumers, and I'll give the word to Jurjan.
Thank you, Niels, and good afternoon, everyone here in the room and the people online. My name is Jurjan Klep. I'm with Scandinavian Tobacco Group for more than 25 years. I have been in different commercial positions around the globe and joined the executive board five years ago. Today, I will talk about consumer trends and the effect they have on the behavior of our cigar consumers. I will talk about the strength of machine-rolled cigars, particularly in Europe, and why we have a right to win in next generation products. Now, Niels already mentioned to you our vision, and we also just got the question. Scandinavian Tobacco Group wants to become the undisputed and sustainable global leader in cigars.
We are well on the way with our strategy, and we are on track, not only becoming the biggest cigar company in the world, but the undisputed largest cigar company in the world. Now, it is evident that we are facing a setback in Europe in 2023 following the supply issues. But we are confident that we have the right plans and initiatives lined out to turn our market share performance around next year. Our industry is rapidly changing, changing consumer behaviors, new regulations, and new product offerings that are entering our market. One thing we believe that will not change is the consumer that is looking for our niche. Consumers continue to have the rituals that we make more with our cigars. Scandinavian Tobacco Group has a long history.
We have a strong portfolio with strong brand equities, and it is this portfolio, together with our expertise, the generations of experience, and the strong capabilities that form the foundation of our success. Let's start where it all begins, and that's with our consumer. Our strategy, plans, and initiatives start by understanding the market context and following the consumer trends that shape the marketplace. There are eight mega trends that define consumer behavior and define the choice of products of the consumers. Health and well-being became the most important trend post-COVID and continues to be so. It's referred to here as moderation and avoidance. The war and economic downturn triggered another concern among consumers, elevating easy and affordability as the second most important consumer trend.
Now, I'm not intending to go through all the eight mega trends shown here on the screen, but I want to highlight three that are shaping the cigar consumer behavior and their preference. Moderation and avoidance is the main reason for consumers to try new products. Consumers are developing a repertoire of different products that they use, but they do not want to compromise on their indulgence. But what is shaping the cigar consumer mostly is that they seek individuality and self-expression. Consumers are looking for authentic brands and products that reflect their values and stories. They do not want to compromise on quality and taste. When choosing their products, they look for a sensory experience and indulgence. And that's also the reason why we have this wide variety of choices and flavors on the market.
Consumers are looking for the brands and the products that are tailoring their needs. Now, cigar making has a rich history. Niels already mentioned how old Scandinavian Tobacco Group is. There are centuries of tradition and connoisseurship that define the complexity of our products. The many different tobaccos that we put in our blends, the origins and soil that give the rich and distinct taste and aroma to our cigars, and the many different formats and shapes, and we have put around a number of these on the tables around you, that give the unique sensory experience of cigar smoking. Jurjan just explained in the video the cultural significance of cigars in celebrations, in rituals, and in social gatherings. Cigars are a symbol of prestige and bring these great moments of relaxation and enjoyment.
What really identifies Scandinavian Tobacco Group is the unique portfolio of strong brand equities. The portfolio of Scandinavian Tobacco Group in machine-rolled cigars in Europe is covering all segments in the key markets. We are leading in many markets, and our leadership position is defined by clear strengths, such as the ability to innovate and the ability to build premium brands. Let me show you a couple of examples. The brand Signature, formerly known as Café Crème, is celebrating its 60th anniversary this year. It was the first small cigar that was launched on the market in 1963, and it changed the whole cigar industry. It was in 1998 that we launched the mini version of the cigarillo in France, under the name Piccolini in 1998. This mini cigarillo format is now more than 20% of the French market.
We elevated the sensory experience with an enhanced vanilla flavoring when we launched Beige in 2018. And it's a little bit small on the right bottom corner, but after the launch, we triggered the market share growth in Spain, where we started in 2018 at 7%, and we will end this year above 10%, and we moved from number three to number two in this market. Another true innovation came only last year, in 2022, when we launched the first super slim cigarillo in France, Italy, Spain, and Poland. Innovation defined the success of the brand Signature, and we continue to see a strong performance of this brand in the key markets. Scandinavian Tobacco Group is leading the premium space in many of the key markets, such as France, Spain, Belgium, the Netherlands, the U.K., and Scandinavian markets.
I can show you a number of examples of strong regional and local brands. Among others, the authentic brand La Paz, made of 100% premium quality tobaccos, and it's leading the premium market in France, Spain, and Belgium. We have the super premium Dutch brand, Hajenius, which is also the name of the famous and oldest tobacco shop that we own in the Netherlands, on the Rokin, a famous street in Amsterdam. I can only recommend you to bring a visit to that store that was established in 1823. We already mentioned the acquisition of MOSI, and MOSI was about acquiring the brand Italico. Italico is the first brand that has been successfully launched and is challenging the market leader in the highly profitable and premium segment in Italy.
It's a new brand, but it's a brand with a traditional Italian product offering that is standing for quality and craftsmanship. Staying relevant for our consumers is the driver of our success. Now, in a quick changing industry, STG has a good track record of staying competitive, adapt to new regulations, and adjust to future standards. By proactively streamlining our portfolio, we managed to win on the shelf and secure space for our biggest brands and SKUs. In our industry, legislation is always changing. Scandinavian Tobacco Group has a proven track record, how we can adapt to these changes and how we can even make things better. I think a good example is the name change from Café Crème to Signature in 2017, following TPD2. Finally, sustainability is a key driver for change.
It's one of the mega trends that I showed on my first slide, but it's also important to STG, and we have started to transform our brands into more sustainable solutions. Here, a good example is the number one brand in Belgium, Gold, that we are changing from plastic to cardboard packaging. Now, I introduced you to the consumer trends that are shaping behavior of our cigar consumers, and that innovation and building premium brands are some of the key strengths of STG in the machine-rolled cigar category in Europe. In the next part, I want to talk more about how STG is adapting to the leading consumer trend, health and well-being, the most important trend post-COVID. Moderation and avoidance is a big driver of our consumers. Consumers do not want to compromise on the taste of their comforting indulgences, but they are looking for less harmful alternatives.
On the screen here, let me first start by showing you how Euromonitor data clearly shows how the next generation products are rapidly growing in the U.S. and Western and Eastern Europe. What you can see on the screen here is the development of the retail value of the total tobacco and alternative nicotine product categories. You can see that the retail value is growing, but on the right-hand side, you can see that the drivers for growth are the heat-not-burn category, nicotine pouches, and vaping. And when we dive a little bit deeper in the two geographies, and we look at Europe, on the left-hand side and the European markets on the right-hand side, we can see a distinct or noticeable difference between the two.
While in the U.S. it's mostly smokeless tobacco, nicotine pouches, and vaping, we can see that in Europe it's mostly heated products and vaping that are driving these markets. What is also interesting, and those are the two charts at the bottom, is that the fastest growing category in both geographies are the nicotine pouch categories. It is the growth of this category, the potential the category has in new markets, in combination with STG's own infrastructure and strong distributor network, that made us decide to increase our investment in this category. STG wants to offer the mature consumer more choices in the moderation journey and search for alternative indulgences. With the acquisition of XQS, or some people say XQ's, we have acquired one of the fastest growing nicotine pouch brands in Sweden. STG has taken a significant step forward by this acquisition.
We already launched our own developed brand, STRÖM, in 2022 in Sweden and the U.K. Earlier this year, we launched the non-tobacco, non-nicotine pouch that we launched in the Danish market. But with a broader portfolio and early success in Sweden, XQS will be our lead brand for international expansion. The category is rather immature outside Scandinavia, and we believe that being one of the first movers will give us an advantage. But of course, it's also evident that the biggest players are increasing their investment in this category. The Scandinavian Tobacco Group has a good track record how to compete also in highly competitive categories in the large markets. Let me give you an example.
Break is a fine-cut brand we have in Germany, and the reason I want to show you this example is because we are able to win in a large market. Germany is the largest tobacco market in Europe, where big tobacco has a big interest and also are very active. STG is a small player. As you can see on the branded business, we are the fifth behind the four big cigarette companies. But on the right-hand side, you can see that we have the fourth brand behind some of the big cigarette branded products. We continue to grow our market share with double-digit growth in volume, net sales, and gross profit. And it is the consistency in our strategy and a strong execution that has been the key, the key to our success. So to summarize, STG will continue to follow consumer trends.
Scandinavian Tobacco Group will further evolve to meet consumer demands. We keep investing in making our brand portfolio stronger, and Scandinavian Tobacco Group will increase investment in next-generation products, both in Sweden and in new markets. We continue to focus on delivering the quality cigars that our consumer is looking for, and we are convinced, and I think this is really important, we are convinced that the demand for cigars will be ongoing due to the significance and longevity of the rituals that go so well with smoking a cigar. With that said, I'd like to hand over to Régis, who will further dive into the world of handmade cigars.
Thank you, Jurjan, and a good afternoon to everyone here in the room and also on the live stream. My name is Régis Broersma, and I lead the North America Branded and Rest of the World division. A diverse division with multiple selling organizations in North America and a strong distributor network in more than 100 countries across the globe. Today, I will be talking to you about one of our key must-win battles, which is grow handmade cigars globally. So in the next slide, I will show you how we use a consumer-centric approach rooted in consumer insights, and also how STG is in a strong position to scale our brands.
So over the last five years, we have been able to grow our net sales of handmade cigars, excluding contract manufacturing, from DKK 2.8 billion- DKK 3.4 billion in 2022. There are three main drivers behind this. One is the deployment of many of STG's new strategies. One of them, for example, is the launch of Forged Cigar Company. Two, is COVID. COVID has been really good for the handmade cigar consumption globally, with a small boom. And three, pricing. Like any industry, like any company, like any consumer, we are also hit by a higher cost inflation. With strong pricing execution, we have been able to grow our gross profit percentage from 40% in 2018 to 47% in 2022. So let's now move to the handmade cigar consumer.
The handmade cigar consumer is truly unique in the universe of tobacco. A handmade cigar smoker does not just smoke one format, not one taste profile, not one brand. Depending on the time, on the occasion, and on the social environment the person is in, the handmade cigar smoker chooses that perfect match. So it's absolutely crucial that we understand our consumers, the drivers, the motivations, their behaviors, in order to come into that consideration set of brands when a consumer chooses and buys a cigar. We've done multiple studies, and we have defined six distinct consumer segments, each with their own behaviors, needs, and drivers. We have tailored our brand portfolio to match those needs in each of those consumer segments. I will come back later on to the Cohiba segment, but I will give another example with the Explore segment.
Consumers in this segment, in summary, they want to be the Indiana Jones of tobacco. They want to explore new taste varieties. They want to be the first one to smoke an Amazon tobacco. They want to be a pioneer. CAO, we have targeted completely to this consumer segment. The brand statement of CAO is also breaking boundaries, matching that consumer segment. To be relevant, we also need to be relevant in pricing. Each consumer segment has a certain price range to be relevant. The strength of STG is that we deliver a product on each price point on the pricing spectrum. We offer a $2 cigar with Odyssey, and all the way to Cohiba, we actually offer a $250 cigar. When the economy fluctuates up and down, discretionary spend fluctuates also up and down.
The strength of STG, we deliver that price point, every price point on the spectrum. So when a consumer moves between price segments, we're able to capture that consumer and keep that consumer in our brand portfolio. So you've heard Jurjan talk about the mega trends. You've heard me talking about consumer segmentation, price segmentation, and we use all those consumer insights to be laser sharp in our brand positioning and laser sharp in the execution of our three-sixty consumer engagement model. This model we use to maximize the touchpoints with our consumers pre, during, and post-purchase. We use this model to increase brand awareness, increase engagement, and also increase conversion to brand loyalty. Each of our brands touches upon the six buckets that you see here on the slide. So these are all nice words, but what does it actually mean in reality?
So I've picked Cohiba to give examples on how the teams are executing this on a day-to-day basis. Cohiba sits and is tailored towards the consumer segment, one of the six, which is called Prestige. So it is all about the consumer, and this segment is all about standing out and being the big spender. So the brand statement and positioning of Cohiba is all around experience, luxury. When the teams activate, everything should breathe the imagery that you see on this slide. It should breathe aspiration, it should breathe, breathe exclusivity and also prestige. So how does that translate to, for example, one of the six buckets, innovation? Our innovation is sparked by consumer insights, and we use all our resources in the company to generate successful innovations, to grow our brands, and to deepen the brand affinity of our consumers with our brands.
There are many examples of innovation. I will use the one on the left side, which is Cohiba Spectre. The segment of Cohiba is all about standing out and being the big spender. If you want to do that, Cohiba Spectre is the right, is the cigar to smoke. It's a $100+ cigar. It has tobaccos that have been nurtured for more than 10 years in our warehouses and only rolled and bunched by the best people in our factory. It is in a packaging that's almost James Bond-like with a hydraulic system. So if you want to stand out, this is a cigar to smoke. We are also not shy of telling a story of our commitment to cigar making. We tell that over and over again to our employees, to our customers, and also to our consumers.
We talk about the seeds, we talk about the tobacco, the curing, the fermenting, the aging. We talk about the craftsmanship throughout the whole journey, and in the end, we talk a lot about the artisanal dedication of our rollers and bunchers. If we link this again back to Cohiba, a Cohiba Spectre is only bunched and rolled by the best buncher and roller in our factories. So they also stand out. So the DNA even sits in our employees in the factories. We are not just creating handmade cigar brands, we are creating lifestyle brands. We want to be part of the daily lives of our consumers, part of their rituals, and we want to make those rituals more.
So we seek collaborations that deepen the brand affinity, and therefore, for example, with Cohiba, we have collaborated with Weller, a high-end bourbon, and we created a cigar where the tobacco has been aged in the barrels of Weller. True unique smoking experience, and we have Sean Williams, our global Cohiba brand ambassador, driving pairing events at luxury estates. Again, deepening the brand affinity and getting into the consideration set of brands when our consumer buys a cigar. Cohiba, all about experience luxury. So we are very proud that this year we opened our first lounge, the Cohiba Experience, at the Ritz-Carlton Bacara in Santa Barbara. So a truly luxurious estate matching the Cohiba DNA and what the consumer in that segment stands for. If you want to stand out, smoke a Cohiba Spectre with a Weller bourbon at this estate.
So we come here, at physical retail, at physical lounges. So it's a perfect transition to introduce to you Sarah Santos, who is our lead of the North American Online and Retail Division, and she will be talking about our Omni-channel approach from our online platforms to our physical retail store.
STG's North America Online and Retail Division is an agile, omnichannel business. We have a proven ability to engage in regulated categories, acquire and retain consumers, and build brands. We set the pace among the industry competitive set, and we do this while building a scalable foundation to support STG's M&A agenda. As the leading internet retailer of handmade cigars in the U.S., with a portfolio of six uniquely positioned business units in the online channel, the expansion of our U.S. retail store network represents a growth opportunity in an area in which STG is underrepresented today. Data shows consumers start their journey in the category through retail stores. They purchase the majority of their cigars there until pivoting to the online channel after five or more years. The key takeaway here is that the retail channel holds half the value of the category.
The primary enabler to the online growth are strong Omni-channel retail, branding, and our unique institutional capabilities. We meet consumers where, when, and how they want to transact, and our strong portfolio of brands transcends consumer lifestyles and smoking occasions to deliver consumer retention. We do this while investing in the growth of our institutional capabilities. These are STG superpowers embodied in our North America Online and Retail Division. Consumers typically learn about handmade cigars and grow their category knowledge in retail stores and lounges, eventually transitioning to online shopping. With our omnichannel retail network, STG is increasingly well-positioned to engage the consumer throughout their journey in the handmade cigar category. To serve our core of one million active online customers, STG has six distinct online retail platforms, each targeted to consumer cohorts determined by modeling behavior and demographics.
Machine learning allows our marketing approach to dynamically evolve as consumer preferences do, with the added benefit of personalization. Our online retail platforms are united by a steadfast commitment to a frictionless consumer experience, built on an unmatched product selection, timely shipping, and customer service support, which together drive consumer retention. In fact, our insights consistently show consumer spend increases according to the length of engagement. Our growing network of retail stores brings the omni-channel experience full circle and plays a vital role in fostering consumer interest in cigars, the foundation for the future of the category. At Cigars International Superstores, we elevate cigar shopping to an occasion that appeals to connoisseurs and new smokers alike.
The allure of a superstore experience is deepened by a mix of national brand and private label cigars and accessories that are not otherwise available, and is further brought to life by the camaraderie that prevails in store. Today, Cigars International operates 10 retail stores in the strategic markets of Pennsylvania, Florida, and Texas. Future stores are planned for these and other U.S. markets, offering an opportunity to grow STG's wallet share among cigar smokers. Institutional capabilities give the online and retail division a competitive advantage. Among them are proprietary and private label offerings, pricing, analytics, and personalization. Our assortment of higher margin, proprietary, and private label offerings differentiate our online platforms and retail stores. Private label offerings and brands created with strategic partners, such as spirits industry giant Sazerac, help to drive new consumer interest through adjacent categories.
Our recent acquisition of La Perla Habana, a well-regarded handmade cigar brand with a niche in the value segment, allows STG to capture the market segment at an above-average margin. In 2023, we implemented a well-regarded pricing platform that provides daily, data-driven insights and facilitates a rapid execution. The end result is an ability to improve conversion, drive profitability, and build consumer loyalty in our online and retail business units. As a direct-to-consumer business inherently rich in data, we leverage analytics to engage consumers and deliver a targeted mix of products and content across a variety of media. With data and consumer insights in the DNA of our division, we are continually maturing and optimizing consumer interactions. A network of world-class partners build deeper, data-driven capabilities into our existing platforms, allowing STG to increasingly harness the power of machine learning and AI to curate personalized communication with consumers.
The end result is a consumer who is not only satisfied, but also more engaged with our businesses.
That works. Thank you, Sarah. A perfect transition back from the online world to the digitalization of our brands. A key focus area of the teams was to focus on our social media platforms for each of our brands in our brand portfolio. This is one of the buckets of the six that you saw in the 360 consumer engagement model, and it's all about driving awareness, driving engagement, and driving conversion to brand loyalty. We have here some of the metrics where we measure on, and with an immersive programming, we increased our gross impressions in the first six months of this year on all our social media platforms for all our brands to almost 22 million impressions, an increase of 25% versus last year.
We are very much focused on video content to increase the engagement rate with our consumers, and we increased it to 17.4%, almost a doubling and much higher than the industry standard. To round off, the click-through rates on our emails have gone up to 19.9%, which is about 11 percentage points higher than the industry standard. So our consumer approach is working, and the consumers are engaging with our platforms, are engaging with our brands, and seeking out our brands when they are at that point of sale, either in a physical store or on an online platform. To round off the story of Cohiba, we have increased our net sales over the last five years with 13% a year. Our gross profit, we have increased with 11% a year.
You might think gross profit grows less fast. That is a conscious decision and a strategic decision that we made because we launched Cohiba Blue, which is an affordable luxury range within Cohiba, which is between $10-$15. It's still in the premium segment, but we want to create as many consumers coming into the Cohiba franchise, and when the discretionary spend will go up in the future, they will move up into the Cohiba price range. So I round off here the consumer centricity based in consumer insights. I'd like to say a few extra words on the scalability. So STG is in a strong position to scale our brands globally via our manufacturing, via marketing, and via our distribution capabilities and network.
As I mentioned, we have our own sales organizations in Jurjan's division, and we also have more than 100 countries where we have a strong distributor network. A few examples on bold decisions that we made. Forged Cigar Company: we created a standalone distribution company in the U.S. from scratch. We staffed it up, we moved smaller, some of our smaller brands into that standalone distribution company, and we have accelerated growth, we have accelerated distribution gains, and we have accelerated market share gains. By creating Forged Cigar Company, we also created room for acquisitions. So last year, we have integrated successfully Room101, and this year we are integrating Alec Bradley. Then you have seen the success that we have with Cohiba. But the Cohiba trademark we can only use in the U.S. Outside of the U.S., the trademark is owned by Habanos.
couple of years ago, we did want to enter the super premium segment in the international markets, so we have taken Cohiba, we rebranded, rebranded it to Silencio, and we have launched it in the international markets. After three years, it's already our fourth biggest gross profit brand out there. And then the last one, international expansion. We have taken all our learnings from the U.S., all our consumer insights, also the consumer insights on the international handmade cigar smoker, and we have focused with our distribution network on expanding our presence. We have done that successfully, 'cause we increased our volume by 15% a year over the last five years, gross profit on net sales with 16%, and gross profit with 18%. Then STG is committed to increase the number of occasions around the world.
Sarah is doing that with the expansion of the retail stores, but we also have strong partners around the globe, and we're launching Cohiba Macanudo lounges across the world. The first one we did last year in Kuala Lumpur. A scoop, we will actually open one next month in Jakarta, and we will continue the rollout in the years to come. This is with strategic partners. They are making the CapEx investments, they are running the lounges, and we license our Macanudo name towards it. So I can talk about this for hours and days, and weeks, but I'll round off here. Thank you for your attention, and I look forward to your questions, and I will hand over back to Torben.
Thank you, Régis. Thank you, Jurjan, and also thank you to Sarah, as you noticed from a video recording just a few days ago. Now it's time once again for any questions that you might have, and once again, I would like to kind of please that we keep them into the framework of what we have been talking about so far. There will be also a Q&A session by the end, where we can have a little more focus, maybe on the financials, but at least for now, any questions you might have for Niels, Yulia, Jurjan, or Régis.
I can start off with one from, from the live stream once again, and, that's how much of the 8% sales from Growth Enablers currently come from nicotine pouches, and how do you see this evolving in the next three to five years? Maybe I can start off by at least taking the first part of the, the question, and that is how much is out of the nicotine pouches of the 8%. Right now, it's in the area ballpark of 3%, so and we will also showcase that a little later. Maybe, Niels, can you give a little perspective to how we'll see this develop in the next three to five years? Maybe without giving precise numbers.
It's always helpful with a little guidance from Torben. So I think that again, when we think about the next generation products, we are taking a careful approach. We can see obviously, the potential of these categories. They are being launched in more and more markets. There are different types of next generation products, and what we are occupied with is finding the categories and the markets where we can meaningfully compete. So we are looking at what does it take to succeed? What are we capable of doing, both in terms of distribution, marketing, and product wise? We are also occupied with not having to build big factories today, find out we don't need them tomorrow, so we're taking a careful approach.
But we do believe that there is potential in the next generation product area, and again, the primary reason is that consumers are changing. More and more consumers are using multiple categories across combustible, across non-combustible, and we have to adapt to that. I foresee this being part of our future. The exact size of it is uncertain. We'll simply have to see how it evolves over the coming period.
Okay, thank you. Then I'll ask if there should be any questions here in the room. Yes, Sebastian?
Yeah, thank you. So as you say, consumers are drawn towards individuality. So could you maybe talk around striking the balance between having a broad brand base, which appeal to different kind of consumers, and then also having a sort of a simplified portfolio of brands?
And yeah, I think I'll leave that to you, Jurjan, and maybe Régis can explore a little bit also afterwards.
Yeah. First of all, thanks for the question. As I said, I mean, one of the focus areas for us is to simplify our portfolio. I think, you know, today we have quite a complex portfolio of many brands and SKUs, but we are currently looking at, you know, what segments to us are the most important ones, and that's how we try to find a balance.
It's about obviously, the profitability and the size of the segment that is driving our decisions. Our main focus here is to build, let's say, a portfolio of less but stronger brands and SKUs. I guess this is the focus area of of us all the time, to try and to find that balance. I think now also one of the questions earlier today was about, you know, potential in more value, for money, you know, segments, and that's, for example, something we're also reviewing now.
Maybe, Régis, you could also explore a little bit from the handmade side, because it's slightly different, what we can talk about there.
Getting crowded here.
Yeah.
Yeah, I think also from the handmade cigar side, it is more niche than machine-rolled cigars anyway. This is also one of the reasons, the individualism, that we actually are looking to digitalize our brands. This is the focus area that we have. We send personalized emails, we send personalized social media content, and this is how we actually drive it through. Yeah.
But would you say that there is a kind of a potential for cutting down on the number of brands, or is it rather the opposite way around?
No, no. It's a continuous process, and we do that every year. We evaluate our brand portfolio, and the handmade cigar category is very much about new innovation also. The consumer is always looking for that next, next thing. Quite a high percent, double-digit percentage every year is driven by new innovation in our portfolio. We have to continuously optimize our SKU portfolio to take things out, so that we make room to put new things in. It's a continuous process.
Did that answer? Perfect. Okay, thank you. Jerry?
Yeah, could I just follow on on that?
Yeah.
Similar sort of question on Cohiba. There's a lot going on with the brand, or there looks to be.
Sure.
How do you balance that with retaining the authenticity of the core premise of the brand? Is that a concern? Am I barking up the wrong tree? Do you think about that sort of stuff? Can you talk about that a little bit?
Could you actually expand a little bit on what you're looking for?
But isn't it too much innovation detracting from the core proposition of what Cohiba is, and if you put too much diversity around the brand, you lose where the consumer should be with the affinity to the brand?
Yeah, and I think Cohiba is actually a special case in in our brand portfolio. So if you look at, we're not launching very much—there's a lot of launch of limited editions, so it's to create a brand awareness and a trial into the brand. So it's a one in and an out. If you look at Cohiba also, when we do a permanent launch, we actually don't see the cannibalization. When we launch, for example, Cohiba Blue, Cohiba Red Dot, Cohiba Nicaragua ranges also went up at the same time, because there was so much activity around it that consumers were drawn to the overall brand. So it is. Yeah, so, so I don't think it is taking attention away from the core, and I said before, we will always do a portfolio SKU rationalization to create that new space.
Maybe just to follow up on the Cohiba, because obviously it has caused some interest. Are we planning to open more Cohiba lounges as the one that we have-
Mm-hmm
... opened up in California now?
Yeah, so it took a very long time for us to actually open that first lounge. The whole reason behind that one is that we were never satisfied with the location and with the premiumness of that, of the locations that were available. We finally got this one up and up and running, and it took us two years actually, to get it right. So are we looking for more lounges? If the property is right, yes, we are.
Okay, thank you. Then I think one for you, Niels. It's about our superstore rollout plans. Can you give any kind of flavor to what we are looking into in 2024 and 2025?
Yeah. We are not succeeding with rolling out as many stores as we would optimally like, but I think I said it before, we are prioritizing locations over speed. We still believe that this opportunity is significant. We also believe that it's important to get it right because it entails both capital investments and more risk than opening or driving another online platform. We are not ready to quantify the size of the overall opportunity, but we are quite confident that it is significantly more than what we have today, but it's also an area where we need to be patient and roll out based on the right locations.
Okay, thank you. We have one more question on the machine-rolled side in Europe and building market share. Will you look at more acquisitions?
Yeah, so we look at acquisitions primarily across the entire cigar range, handmade cigars, machine-rolled cigars. We are looking for all these categories, and as I said before, we're looking at them based on where we see a particular need. That need can be a market where our market share is weak, but primarily, we're really looking to build stronger and stronger brand portfolios. And maybe as a follow-up to the question that was asked before, when we look across any category, we have a long-term interest in narrowing it around larger and larger brands. Now, the U.S. is still a fairly liberated market, but across Europe and across the rest of the world, we see more and more regulation that benefits large brands.
This also means that we regularly discuss, are there brands that can be migrated from their current trademark name to another trademark name that we believe hold a bigger potential? That's also an ongoing discussion we have.
Okay, thank you, Niels. Once again, if you have any questions, please type in on the Slido facility. Anybody else here? I can say that efficiency is at the core of this company, so we have been quite efficient already today with the presentations. We're slightly ahead of time, so we have good time for further questions, or we might extend. Yeah, there's one for you, Sebastian. Thank you.
Yeah, thank you. So you say you're going to follow consumers into new markets and categories, and so far it's been primarily centered around nicotine pouches, et cetera. As you showed earlier, there's also other categories where there is a lot of growth. Are there any of these categories where you say, "We're not gonna compete here at all?" Is there any of these categories we can sort of exclude, looking forward?
Yeah. I think maybe it's once again for you, Niels.
I think that the category discussion is very difficult because we see some technologies that are well advanced, and we see some that are less advanced. We also see some categories where regulation is getting quite clear, and we are seeing some categories where regulation is still very unclear. So again, I need to come back and say: we are not ruling out anything upfront, but I think we acknowledge that we are not big tobacco, and we are not able to compete, you know, head-to-head with big tobacco. We also acknowledge that we can compete in many of these categories better than some of the entrepreneurs that are starting up and building brands from scratch.
Maybe the intersection between where the entrepreneur has to give up because they simply don't have the ability to scale up is where STG has a role to play. We think about these new categories very much as something where we need to prove that we can compete, and we believe currently that there is a role as, let's call it, the largest among the smaller players. Therefore, we are not making category decisions. We are making mostly considerations about where it's meaningful for us to engage.
Maybe to rephrase your question a little bit, Niels, could we imagine that we would enter heat-not-burn or vaping?
I think that, you know, it's not for me to stand here today and rule out anything that I will regret, six or 12 or 18 months from now, but I think that the more technical a product becomes, the less likely we are to be able to compete head-to-head with large, you know, tobacco companies. Again, you know, when we stood here 10, 15 years ago, nobody imagined the types of products available in the market today. I also don't think we've seen the last invention or the last type of product in the next generation area. I think that we will be open, but we'll also be conscious of our own shortcomings.
Thank you. Any more questions here from the room? Yeah, Gary.
Could you remind us of what metrics you apply when deciding, to launch, open a new retail store in the U.S., and remind us of what role excise plays in that decision-making process?
Yeah. Yeah, let me, let me start. So every store has a investment or CapEx of around, I think we have around $7 million, $5 million-$7 million. We are primarily placing stores in states where there's zero or very low excise tax at the moment. I also think that at one point in time, we will need to place stores in states that have a higher excise tax. And the reason we are starting in the low excise tax states is because they're actually very cigar friendly, and there's a high, let's say, preference for cigars. Now, when you look at, let's say, the criteria that are critical for some of these stores, it is about traffic flow. And it's the...
An easy way to explain what we are looking for is to say that the first superstore we ever built, we built next to the largest Cabela's outdoor store in the U.S. That's a store specializing in hunting, trekking, and outdoor in general. It has more than six million visitors every year. We are right next to it, and there's a nice overlap between customers going to Cabela's and customers smoking cigars. So similarly, one of our most successful, more recent stores is located in a large development funded by somebody you are all familiar with, with the, the Berkshire Hathaway, where they are building—they have a huge furniture store, they have hotels, they have restaurants, they have apartments. It's an area which is just super attractive in the outskirts of Dallas. So location is very, very important. Traffic flow is very, very important.
And then you can say that the second thing we are looking to understand better and better is how do these stores ramp up optimally? Because all the stores are practically profitable from day one. But the critical thing for us is, of course, that we can ramp them up fairly quickly to provide the necessary return on invested capital, and also here we are saying that return on invested capital, I think we've said, needs to be higher than what we return on the group, which is currently around 14%-15%.
Yeah. So it is investments in our retail store segment is contributing to raising our group return on invested capital. And we have actually said before that when they are up and running after three years, we are close to 20%. And maybe I don't know if it's a fun fact, but at least an additional fact of the net sales out of the retail stores, a relatively large portion comes out of the bar sales and not necessarily only cigars.
It's first and foremost a cigar store, we should say, but there's also bar sales. Yeah.
Okay. Any more questions from the room here? Otherwise, I think we have gained a little time on the break that we're going to have now. We will start up, I would say 10 minutes past 4:00 P.M., sorry, 2:00 P.M., almost Danish time. Ten minutes past 2:00 P.M., and then we will be back also on the live stream. Thank you so much so far.
Okay, welcome back. Now we are approaching the third section of our Capital Markets Day. We have been talking about our company, why we believe it's a unique company. Basically, who we are as a company, the transformation we have been through. But we also have been focusing on our consumers, our brands, and our products. What we see, what aspiration we believe those have. And now we're turning to what we call the value proposition, and that is basically trying to give you a few more insights to how we expect to kind of transform this into growth and value for our shareholders and our company. We have five distinct parts we would like to walk you through.
First of all, operations, that is clearly a key for, for value and how we deliver both efficiency and profits out of our business and our strong portfolios. Secondly, it's also about how we think about M&A. Why is it that we believe that we can create value with mergers and acquisitions? Then we will go to the, the underlying business units. In the first section, I showed you a slide about our core categories and our Growth Enablers, but how do we see that play out in the longer-term perspective, and what contribution can we expect out of those? And then we'll finally link it all together into our financial ambitions and our capital allocation policy. So with this, I will leave the word to Jesper, and he will talk about our operations.
Thank you, Torben, and welcome back to everybody with us here in London and to the people who are joining us on our live stream. My name is Jesper. I'm the Chief Supply Chain Officer for Scandinavian Tobacco Group, and I have been with the company since March this year. I look forward to giving you a little bit of insights into how we operate in the company, talking a little bit about our manufacturing distribution network, our operating models, but also giving you insight into how we work with efficiency, innovation, sustainability, risk management, and a little bit of what we've learned in the last two years with our supply issues. So jumping to our global manufacturing network. We operate a global manufacturing network with 12 manufacturing sites spread across Asia, Europe, and Americas. The location of our manufacturing sites are based on balancing three design principles.
Firstly, closeness to our markets. When we look at handmade cigars, this means the U.S. When we look at our machine rolled cigars, that means Europe. Second of all, being close to suppliers of raw materials and the necessary skilled labor. Thirdly, our factor cost, mainly the cost of labor, but also the possibility of automating our production. Most of our factories are focused on one of our product groups, being machine rolled cigars, machine rolled wrappers and binders, handmade cigars, or smoking tobacco. The manufacturing sites in our network is a combination of sites that we have built and owned, and sites that has come to us via acquisitions. The sites in Italy and Sri Lanka are examples of sites that we have acquired. The manufacturing sites are supported by own and outsourced distribution centers in Europe and Americas.
The products are shipped either from our manufacturing sites directly to our customers or via our distribution sites to our customers. STG continuously evaluates the footprints of our manufacturing and distribution structure to make sure that it remains efficient and supports our commercial strategy. If you look at our manufacturing model, we believe very firmly that we operate a distinct manufacturing model compared to other cigar manufacturers. Firstly, because we operate both within the machine-rolled cigar space, but also within the handmade cigar space. We do the high volumes on the machine-rolled side, but we also do the premium handmade in the handmade segment. This requires two very different sourcing and manufacturing setups that we need to manage well. Secondly, we also operate with a relatively high level of vertical integration compared to some of our other cigar manufacturers.
The manufacturing of our handmade cigars is by far characterized by the highest level of vertical integration. Here, STG performs majority of the activities related to preparing the tobacco and manufacturing the products, except for the growing and harvesting of the tobacco. The full sourcing and manufacturing cycle for handmade cigars can take years, depending on the type of cigar that we're making. In the manufacturing of machine-rolled cigars, STG relies much more on tobacco merchants to do the preparation of the tobacco for us, and here we more operate and take care of the manufacturing activities. Hence, we operate with a lower vertical integration than what's the case in our handmade cigar business. The two operating models pose very different requirements on STG in managing both mass production to be successful and delivering quality products that meet the needs and preferences of our consumers.
When you think about STG, most people think about a manufacturer of own brands of cigars. However, if you take a step back and look across the value chain, we actually play multiple roles in where we sit in our role in the manufacturing, but also in part of distribution and sourcing. We do contract manufacturing for other cigar manufacturers of both semi-finished goods, like wrappers and binders, but also finished products. We also do contract distribution for other cigar manufacturers or next-generation product suppliers like ZYN, that Sarah mentioned in Americas. We have the sourcing and distribution of third-party brands, where we buy brands that are non-STG and actually sell it through our infrastructure. And then lastly, we also source part of our products through third-party manufacturers and then sell it through our own structure.
STG takes on these different roles across the value chain to explore our capabilities and assets in the best possible way and to maximize the commercial value that we bring back to the business. We seek to expand into areas or roles where we have strong capabilities or assets and can increase our utilization of these. Contract manufacturing and distributions are examples of those. Similarly, STG also works actively with outsourcing, where our capabilities are limited compared to suppliers, or where the investment needed in assets or in time is too high compared to sourcing them from a third party. STG uses outsourcing in some manufacturing and distribution activities already. Niels, earlier today, referred to the two operating model in our core categories, handmade cigars and machine-rolled cigars.
Let me expand a little bit on the differences between the two, and how we manage to balance between mass production and craftsmanship. Machine-rolled cigars are characterized by high volume. It's high automation and high capital intensity. Focus is on simplification, it's on efficiency and excellence to secure a high yield of our materials and a low conversion cost. Utilization of assets and the cost of materials are key measures for this product group. Flexibility in product and material changes are lower than in handmade cigars because we are highly automated. Production volume remains the key driver of cost. In handmade cigars, we're characterized by low volume, high complexity in terms of brands, innovation cycle, and also in terms of special products. Focus is on craftsmanship, combined with unique materials and unique production methods.
Production is labor-intensive, it's highly dependent on personal craftsmanship, skills, and there's a limited automation in what we do. Tobacco preparation is a complicated process compared to machine-rolled cigars. It can take, as we just also mentioned, up to 10 years, actually, from we plant, grow the tobacco to actually finish the cigar. I do say that it's not necessarily the norm. It is usually between one to three years when we look at the different types of cigars we have, we have in the handmade side. We carefully manage these different requirements in our operating model between the two product groups to make sure that we deliver the value to our customers according to each product group. Now we'll hear from our Head of Leaf, Jhonys Diaz, who will talk a little bit about what actually makes handmade manufacturing special to him.
The making of a cigar is really labor intense, and the journey starts with the seed beds. And then after that, there are number of activities where the people is all the time touching and caring about the tobacco. Starting with the growing, going through harvesting, fermentation, desiccation, the cigar making itself, and then the packaging. So the number of time that people touches the leaf and the product itself is just countless. We can group the tobacco processing and the making in two phases. In the first group of processes, the growing, the processing, is more science involved. But in the second piece of the whole, the process is actually more artistic, is art.
Then the tabaqueros, the rollers, people in the packaging, they have to put their soul and heart in the final product. So all this passion goes into the craftsmanship, and in the end, what we got is a masterpiece of art. It's an art.
So thank you, Jhonys. Now, as I mentioned, efficiency in operations is the essential factor in STG across all our types of products. And that is to protect the profitability, given the declining volumes and the factor, inflation that we see. We hunt for two types of efficiency, to protect the cost base and earnings. One being cost efficiency, where we try to limit the impact, of the negative cost inflation and volume decline on our variable and fixed cost base. Second is capital efficiency, where we focus on improving utilization of our assets, but also identifying new opportunities for reducing costs through technology. We realize the gains in efficiency in two ways: firstly, through ongoing improvements in our daily operations, and secondly, through mergers and acquisitions.
We consider many different aspects of the cost base for efficiency gains, including changing our structure, our processes, changing our organization operating model, and also our quality of service. My colleague, Yulia, will touch a little bit more on efficiency through M&A at a later session. Besides efficiency, which is a key for our profitability, we are also knowledgeable that innovation is important for STG to move forward, and we bring with us, in the operations side, new innovative ideas to bear across many different areas of our operations: tobacco, materials, products, and technology and process. Within tobacco, STG is researching new growing methods for tobacco that can bring both, operational benefits, but also will be good for sustainability. Based on our extensive tobacco seed bank, we research ways to modify the nicotine content in tobacco.
Also, try to lower the carcinogens in tobacco, enhance the desired characteristics like taste and aroma and resistance to diseases, but also look to improve the leaf size and texture of tobacco. We also developed several new tobacco types based on the seed bank that we already have established and been able to launch new products based on that. In relation to non-tobacco materials, we consistently work with different materials and appearances to increase the appeal of our products to our consumers. At the same time, we look for opportunities to introduce materials that can reduce complexity, can reduce cost, and increase sustainability. When it comes to products, we experiment with different materials, different production methods, different compositions and constructions of our cigars to satisfy the market. Finally, we also work with selected external partners, as Richard and Sarah also alluded to, to create very special products.
Lastly, STG takes the opportunity to use new technologies to drive effectiveness and efficiency in our operations, while supporting our goal to become a global and process-driven company. As mentioned earlier by Niels, sustainability remains a core priority for all of us in Scandinavian Tobacco Group, in our quest to become the sustainable and global leader in cigars. In operations, we focus on five areas to deliver on our ambitions in reduction of consumption and emissions, as well as social responsibility. The first four from the left is related to our efforts net zero along the Journey of Leaf, and the last one is related to our Sustainable Community Pioneers. In terms of climate change, we focus on activities to reduce consumption and emissions across everything we do. That means changing to renewable energies. It means also investing in new, efficient equipment and reduction of waste.
For our water management, we are looking at developing new growing methods for tobacco that can reduce water usage, but also looking at technologies for water harvesting, for treatment, and usage optimization. Land use and responsible agriculture is about protecting biodiversity in relation to the growing tobacco. It's also to find new ways to grow tobacco, where we minimize the impact on the land, could be soilless growing and could also be regrowth of tobacco. And then we wanna use all our means to reduce the use of fertilizer, pesticides, fungicides, and other harmful agents that are used as part of the growing of tobacco. We also look for reusable materials and packaging, reducing the waste in our sourcing and manufacturing, recycling materials, and use sustainable materials for products and packaging to a great extent.
In social communities, our focus is on providing our employees with better healthcare, better education, better transportation, and support relevant charities. At the same time, driving diversity inclusion, women's enablement, and eliminating child labor. There's no denying that the last two years have been difficult for STG from a supply perspective. Being unable to properly serve our customers and markets with the necessary volume and right mix of products, has provided us with a number of learnings. These learnings we are now using to build a more resilient operation setup going forward. Transparency and predictability are two things that we need to improve on. We are missing general transparency in our global operations, mainly due to many different systems, data quality issues, and non-standard processes, which in turn makes us slow in decision-making, but also results in decisions that are either based on limited or no facts.
We also miss predictability, both in our demand and our supply outlook, which sometimes impacts our ability to deliver a reliable customer experience. We're reducing these gaps with the implementation of our global SAP system and better standardized processes, which will create better transparency and a better basis for demand and supply outlook that is more sufficient. We operate a complex business, both in terms of products and supply network. We are mitigating this by simplifying our product portfolio and setup, looking at our supply network, but also implementing standardized, globalized processes. Finally, we need to improve on prioritization and execution, both in our day-to-day activities, but also on our strategic priorities. We're putting in place better structures and better processes, and established a new governance structure also to make sure that we focus on the right things, and we also deliver more quality in the selected initiatives.
We continuously monitor operational risk at STG across a number of different areas, both internally but also externally related. We operate a structured process in cooperation with our risk management team, to make sure that we have a constant view on where we sit. We consider different risk types across supplier-related risk, financial risk, IT, and other types of risks, and we define the appropriate actions to make sure that we can mitigate risk, both on the short term, but also on the longer term perspective. An operational risk that you would not find on the list on the slide is a risk related to integration of mergers and acquisitions by STG.
Why STG can manage the operational risk with mergers and acquisitions and deliver value through M&A is the topic of our next session, where my colleague, Yulia, will tell you how we successfully work with mergers and acquisitions. Over to you, Yulia. Please.
Thank you, Jesper. And I have heard that there were already quite a few questions about M&A, so clearly it is a very interesting topic, and I will aim to share a bit more details that I can do today. Yes, let's talk about M&A. M&A is one of STG's strategic priorities, and it is a significant source of value for us. With M&A, we can expand our product portfolios, both in the core but also in the new categories. We can drive scale and efficiencies. We can build our capabilities further and enable the transformation of the company. And we consider two types of M&A, transformational and bolt-on. Transformational are those acquisitions that allow us to significantly improve our position in existing categories, or that provide us with access to completely new markets or new categories.
And those are usually larger acquisitions, and there are a few truly transformative acquisitions that we can pursue in the next years. If we talk about bolt-on, those can be viewed in a more pragmatic way. So they are usually somewhat smaller, and they allow us to improve our position in a certain market or supplement our portfolio in a certain segment or category and gain some efficiencies. Bolt-on acquisitions are also a little easier to onboard and integrate, and we see that for us, in order to achieve our strategic agenda, we need to do both transformational and bolt-on acquisitions. STG has a very successful track record with M&A. If we start from 2018, since then, we have completed eight acquisitions and acquired and integrated into our business, and I will talk a little bit about some of them.
Quite a few years ago, we acquired Thompson and Agio. Thompson, just to remind, this is a U.S.-based handmade cigar online platform, and that was one of the larger players in the market, and Agio that was a machine-rolled cigar manufacturer based out of Europe, and that actually spanned across several markets in Europe. So both those acquisitions can be considered transformational because they helped us significantly improve our positions. Both businesses are well integrated into our company, and they are delivering high double-digit return on invested capital, post-integration. Later on, we have acquired MOSI, or a share in MOSI, and this is an Italian-based machine-rolled cigar manufacturer. It's a smaller brand, but a very nice addition to our machine-rolled cigar portfolio. Then, followed by acquisition of Room101, which we just talked about.
And Room101 is also very special. It's a smaller boutique brand in U.S. in handmade cigars, and it provided us a footprint into, into this boutique segment, which is very popular with consumers. Those acquisitions, MOSI and Room101, they are more bolt-on, so they were smaller, they are also well integrated, and they are providing strong brands and good growth trajectory. And then during this year, we have completed two acquisitions, and recently followed by a third one. First of all, we acquired Alec Bradley. This is a U.S.-based handmade cigar business and medium-sized brand.
Very, another good addition for our portfolio, and we can see that we can develop this business further in U.S. across our channels, in online, retail, and wholesale, and we can also bring this business even further into the international sales, which is very valuable for us, for our international handmade cigar expansion. And then in June this year, we have acquired, or we have completed our first acquisition ever in the new categories, and you can see we are all very excited about it. And XQS, based out of Sweden, again, another example, even though the brand has been in the market for only a few years, it has demonstrated really positive growth trajectory, and we can scale this business further.
Looking forward, we will continue to pursue opportunities in our four categories, so handmade cigars and machine-rolled cigars, and we are also open to explore opportunities in the new categories in order to strengthen our position there. STG has been successful with M&A, and we have consistently delivered value with M&A. Our secret is our disciplined approach to execution. This approach is based on the end-to-end process that spans across strategic screening, deal execution, and integration. Another component is high focus on value creation. So if we start with the screening, this is where we are already selective with the targets that we choose. We are also leveraging our insights about the categories, about consumers, about the markets. Already at this stage, we are evaluating potential synergies, value, and feasibility of integration. Then if we move to the next stage, deal execution.
Here, we rely on the cross-functional team, who has experience in successfully completing the deals in STG, and we are also leveraging our strong network of external partners. When it comes to the integration, here, we can capitalize on the integration methodology that we have developed on the back of the previous acquisitions. And again, we have a very experienced team who know how to drive the integration management process and also know how to onboard functions and processes into various parts of our business. And M&A, I know it is about becoming bigger and more efficient, but it is also about becoming more competitive. And we are confident that, with this disciplined approach to M&A, we can create value, and we can truly step up performance for STG, especially when it comes to the transformational M&A.
Here I will hand over to Niels, who will talk about our expectations about the core, but also about the Growth Enablers.
Thank you, Yulia. Now, when we look across tobacco, I think it's fair to say that all traditional tobacco categories are in what we call long-term decline. COVID may have changed some of these trends temporarily, but the base assumption that we are using at least, is that the categories are in long-term decline, and that's also why we focus a lot on pricing and market shares. With declining volume, net sales comes from the ability to offset volume declines with pricing, with mix, and with market share gains. On top, Scandinavian Tobacco Group has the opportunity to add top-line growth through acquisitions and through our investments in the Growth Enablers.
Now, all of that sounds easy, but I think we all know that it's not a straight line, and we take some steps forward, but we also take some steps back. For Scandinavian Tobacco Group, I think we've shown over the past decade that we are moving forward, and we are creating a larger and more profitable company. I think future success is based on continuing down the same path. We must execute well on all the key success criteria, and we must watch carefully total market developments and developments in price sensitivity. In parallel, we try to create a cost structure that supports margin enhancement on a like-for-like basis, and that is also why we from time to time implement cost outs to rightsize our cost base to reflect how we see developments in total markets and in pricing.
Now let's take a look at the total markets. The handmade cigar category saw a significant boost under COVID, but it has now returned to declining and at decline rates that are higher than the historic 1%-2%. Both in 2022 and in 2023, we've seen the handmade cigar market in the U.S. decline at what we consider to be mid-single-digit rates. And although we are confident that the consumption will stay above the pre-COVID level, we are uncertain about when and at what level consumption will flatten. Predictability is simply down for the category. Outside the U.S., we see growth in the handmade cigar category because here, consumers have continued to engage with the category even after COVID, and we continue to see a high and increasing interest.
When we look at machine-rolled cigars, we see an average decline rate being fairly stable around 3%, but with large variations across markets. Markets like Germany, Italy, Spain, are much more resilient than France, U.K., and Benelux, where decline rates have been above the average of 3%. All in all, we continue to see higher volatility in total market developments than before COVID, and for all mass market categories, we are also trying to create a clearer link between the success of next-generation products and the impacts on cigarettes, on machine-rolled cigars, and on fine-cut tobacco. Let's try to deep dive a little into the U.S. handmade cigar market based on the data we do have available. So let me start with a disclaimer. As data accuracy in this category is just not perfect.
However, we are confident that these import data does provide a correct directional picture. And please keep in mind that these data are primarily based on inputs, sorry, on imports, so that, inventory developments in the U.S. also influences the conclusion on actual consumption. But what is a fact, and what's very clear from the chart, is that COVID has been very good for handmade consumption, not only in the U.S., but globally. Consumers are simply in better control of when and where they decide to smoke, and, handmade cigars are being consumed, and more handmade cigars are being consumed than before COVID. Now, as I said, consumption is trending down in 2023 and possibly also in 2024, depending on the level of optimism or pessimism of U.S. consumers.
However, we remain confident, as I said also before, that overall consumption will stay above pre-COVID levels of around 350 million cigars. Now let's try and look at handmade, at machine-rolled cigars. Sorry, at channels. So historically, online, the online channel has represented around 60% of handmade cigar purchases and 50% of value. COVID changed this, and even though the online channel is recovering in 2023, we will still not be back at 60%. In the course of 2023, we've seen online channel recovering based on increased consumer traffic, and we expect this to continue into 2024, especially as the online channel continues to be the channel offering the most affordable pricing. This should benefit Scandinavian Tobacco Group, along with the continued expansion of our U.S. superstores.
On top of that, we have by far the largest net sales, or the sales network, for our own national brands. These are the two companies that we just talked about, General Cigar Company and Forged Cigar Company. And on top of that, we even operate the largest wholesaler of handmade cigars called Meier & Dutch, that distributes, a number of handmade cigar brands to smaller U.S. customers. So all in all, we are in a good position to outperform the market trend in handmade cigars in 2024 and beyond. Now, we will turn to the machine-rolled cigar market. There's no, way of hiding that machine-rolled cigars has been a challenge.
We see a long-term decline trend across our top seven markets of around 3%, but for STG, we suffer from segment and market mix that makes us more exposed to market declines in markets such as France, U.K., and Benelux, where decline rates are higher than the average. On top of that, we lost market share due to our supply issues in 2022, and we are not seeing the expected recovery in 2023. However, we have upped our initiatives to turn this development around, and we should not be losing market share in this category, and I'll come back to why in a minute.
The turnaround of the market share is a top priority for the Euro Branded team and for STG, and I'll give you now a few of the reasons why I believe we should be able to turn the development around. Now, first of all, we have fully resolved our supply chain issues. It should no longer be holding us back. Second, Scandinavian Tobacco Group is the market leader in machine-rolled cigars in Europe, and we have strong brand portfolio and many strong market positions, as Johan also explained. We need to show that we can leverage this in the next period. We will maintain focus on driving price increases, but we will also become more tactical on pricing in key markets and in key consumer segments.
We already now see the positive, the early positive effects of this in some markets, and it will be supplemented by more innovations and more initiatives to protect volumes. Because volumes are critical for our margins and for our long-term cost efficiency. And with Track and Trace coming into force in May 2024, we will try to leverage this as almost all our machine groups have been through and prepared for Track and Trace and be able to be compliant. So there's an opportunity in being able to leverage that as competitors hopefully will have more than a few challenges. Now, let me hand over to Torben, who will talk a little bit about our margin improvement levers before I will come back and talk more about our Growth Enablers.
Yeah. Thank you, Niels. As Niels just has been through and talked about the net sales drivers, I will just shortly touch on our margin kind of levers as we see them in our core business units. First of all, we have pricing as one of our key kind of levers to go for. We have scale benefits, and we also have efficiency improvements across our business. When it goes along pricing, of course, premiumization of our product portfolio is one thing. We just talked about Cohiba and what we're doing with that particular brand, but there are numerous other examples to it.
We are constantly working with, with pricing to getting the compensation of the volume declines that also, over time, of course, will benefit our margin development. It is also about the scale side. When it comes to scale, the more scale we have as a company, the better procurement benefits we can get out of it. And just in a moment, Sarah will explain a little bit about some of the distribution capabilities we have that also delivers benefits to our margin structure. When it comes to efficiency, I think, Jesper, he talked well into some of the dynamics that we are looking at in order to constantly improve efficiency in our operations. That's, of course, a core. Also, One Process we have alluded shortly to that is also a key component.
Over time, when fully implemented, the project of ERP implementation will, by the end of 2025, be delivering about DKK 150-200 million in benefits. That's the target we are going for, and so there is more examples. But now I'll just let Sarah explain a little bit about our distribution capabilities.
STG's distribution capabilities outpace those of any other company in the handmade cigar category. Located in Bethlehem, Pennsylvania, our humidor is the largest in the world. The 200,000 sq ft facility has supported the recent acquisitions of Room 101, a boutique cigar brand, and Alec Bradley, a significant mid-size brand in the category. Our distribution center relies on an innovative automation platform by Toyota called AutoStore, which fulfills orders utilizing robots and manages inventory. With AutoStore, STG has shifted from a labor-intensive model to one that is faster, more accurate, and more efficient with the ability to scale. The solution has also reduced cost to serve, taking STG's U.S. distribution capabilities to the next level.
The sophistication of our distribution model, coupled with our e-commerce expertise and ability to operate in a regulated industry, contributed to PMI's awarding us with the direct-to-consumer e-commerce website hosting and distribution of ZYN nicotine pouches. As part of this strategic partnership, our business intelligence team also collects and delivers many benefits to PMI, including insights on e-commerce transactions and the consumer journey, adding further value to the partnership. These examples illustrate STG's ability to execute, and they highlight the high regard with which STG's institutional capabilities are viewed, especially within the context of a regulated category. STG's distribution cap-
I think we have it. So, but thank you to Sarah, of course. But just to summarize here, Niels has talked about the net sales component. Yes, we do believe that we can grow net sales out of our handmade business, constituting around 35% of the company. We do believe that the machine-rolled cigars can deliver flat to maybe slightly increasing top line over time. And we do believe that the smoking tobacco businesses, yes, there is structural declines. It can be difficult to compensate fully on price. It's still our ambition to do so. But overall, I think it's fair to say that growing the net sales out of the core business segments, that's still achievable for our company.
When we then add on the efficiency margin levers I just alluded shortly to, there should be a case for us to deliver also EBITDA growth over time. With this, I think we'll just dig down a little more into the new Growth Enablers.
Thank you, Torben. So, Scandinavian Tobacco Group's Growth Enablers are three growth opportunities that we've identified, of which two are related to our core cigar business and one related to what we call next-generation products. We have been expanding our retail footprint in this cigar superstores in the U.S. over the past few years. But we have also been progressing a little bit slower than we would like. But we remain convinced that this is a good opportunity for the group. The prospects for growth of international handmade cigars has really changed over the past couple of years. COVID has helped, but most of all, the Cuban supply issues and the new Cuban price policy with very aggressive and high prices has opened up for more opportunities for companies like Scandinavian Tobacco Group.
We are looking closely at how we can accelerate the growth we are already having, by simply leveraging our strong brand portfolio and our manufacturing and innovation capabilities, even better. And finally, we are increasingly confident that we have a role to play in next-generation products. It is new to us, so we are approaching it carefully, but our initial experience is positive, and we are taking an asset-light approach so that we maintain reversibility at a high level. Let's take a closer look at each of these opportunities. It's still early days for our retail expansion, and since our last Capital Markets Day, we've opened one new store in Austin, Texas, and two new stores in the greater Houston area, also in Texas.
This is less what we aim for, but we are prioritizing the right locations over speed, and we are currently investing even more resources in creating a more predictable and stable flow of new outlet potential. We're learning from each store opening, and we are continuing to assess the overall size of the opportunity. The investments, as we talked about earlier, are not immaterial, but we continue to believe that the stores will be margin enhancing for the North America Online and Retail Division and help improve the return on invested capital at the group level. We have three more stores planned for the end of 2024, and I would like to remind everyone again that the stores, or that a contemporary retail environment is important for the long-term health of the handmade cigar category.
Practically all consumers start in physical retail. They stay in physical retail and engage with the categories for five to six years before they move into online. This is also why the stores are important, and on top of that, they do provide an excellent source of consumer insights and of course, a place for us to push our strategic brands to consumers. Let's take a look at next-generation products before returning to handmade cigars again. Now, it is fair to say that I have been skeptical about whether it was right for Scandinavian Tobacco Group to engage in next-generation products. Our main business is cigars, and maybe we should just concentrate on cigars. However, we can see consumer behavior changing, and consumers are increasingly, increasingly becoming multi-category users across combustible and next-generation products. That is why we are moving to establish a footprint in these categories.
Scandinavian Tobacco Group is not immune to this development, and we have an infrastructure in place in many markets that allow us to compete better than many other smaller companies in this space. We should leverage that, and we are doing just that. So far, we've embarked on various projects within the white pouch category, including a small acquisition in Sweden. And the acquisition of XQS in Sweden is an excellent test of whether we can be a good owner of a white pouch business and whether we can add value. And luckily, the initial results are positive... but these are also categories that will require more investments to build scale before they start producing a satisfactory return. So at this point, we remain optimistic, but we also remain in a learning mode, and as I mentioned before, we are careful about what commitments we're making.
Let's now return to handmade cigars and look at the growth opportunities outside of the U.S. Now, growing our international handmade cigars has actually always been a priority for STG, but it's been difficult because we've been up against a very strong Cuban base and Davidoff, and we've been starting from a low base. However, in recent years, we've been able to build momentum, and that momentum is what we are trying to sustain. The basis of our expansion is a stronger and stronger portfolio of handmade cigar brands. Macanudo, CAO, and Don Tomás have formed the core portfolio for several years, but more recently, we've launched Silencio, an international version of our U.S. Cohiba brand into the super premium segment, and we've also acquired Alec Bradley.
I'm convinced that as we develop Room101 even further, this will also find its way into the international portfolio. When we think about the international expansion of handmade cigars, we think about it as a slow burn, but one that is important to achieving Scandinavian Tobacco Group's long-term vision of becoming the undisputed and sustainable leader in cigars. As we build our size outside the U.S., this is an area where we can leverage our strong innovation pipeline in the U.S. without adding significant additional cost, as well as our strong innovation and manufacturing capabilities. Now let me move on to see how the Growth Enablers affect our earnings going forward. Together, the Growth Enablers continue to represent a relatively small proportion of overall net sales with about 5% in 2022.
However, in combination, the opportunities hold significant potential for both growth in net sales and earnings. As we allocate more resources to support these opportunities, we will see short-term negative EBITDA impact, EBITDA margin impact, but we should also see healthier growth rates and growth in absolute EBITDA over time. We only continue these investments if we remain confident of a satisfactory return on invested capital, and we will be conscious of the reversibility of especially our next-generation product investments. Scandinavian Tobacco Group will remain first and foremost a cigar company, as reflected in our vision. But, it is also critical to keep building a larger company, more exposed to new and emerging categories, and I am very pleased to see that we are making good progress in this area. Let me turn back to Torben for our financial ambitions.
Yeah, thank you. Now we are approaching the final session or section of the Capital Markets Day. First of all, of course, looking at financial ambitions, that is the core to also create shareholder returns. Let me just remind you a little bit about our financial ambitions. It is to grow our EBITDA margins over time. Of course, it is subject to change in business mix acquisitions. That is of course very relevant to be aware of. It's about generating high average growth in the cash flow, and then it's about improving invested capital over time. If we look at our current financial position, we claim it to be strong.
It is of course centered around our financial policy and subsequently also our shareholder return policy. That is, how our leverage, that is, delivered. We have a target of 2.5 times. We have rarely been at the target. We have in many years been quite well below, as you can see out of the slide here. And we currently are at 2.1, and we expect it to `be close to two by the end of this year. I can say that just recently Moody's, our credit rating agency, has just confirmed our investment-grade rating, so also they feel quite confident about our situation. You can also see that we have what we believe is a well-balanced funding structure.
We have a corporate bond that is expiring in 2025, about two years from now, and then we have a revolving credit facility that we can draw on with ample opportunities still to finance our operations and also smaller investments. Having said so, let's just look at the capital return part. We have talked a lot about how much we have returned throughout the past years, and just in relation to our quarterly report earlier in November, we actually announced a new share buyback program of up to DKK 850 million, and that will be running until the end of 2025 at maximum. So we have basically the next 15 months to acquire shares in the market.
Of course, this is a testimony for how we see our financial strength right now, but it's also on our delivery to our capital allocation policy, where any excess cash that we believe we have in the book that will be delivered back to shareholders, assuming there are no investment opportunities ahead of us. Just a few words on year-to-date performance. I'm pretty sure most of you have seen our quarterly report that we announced two weeks ago. What we see here is basically for the nine-month period, we are seeing that net sales are trending down with 1.8%. We have been talking a little bit about some of the drivers behind it, but we also see that the margin overall is slightly down compared to last year.
The free cash flow generation of around DKK 600 million, that is basically generated in the third quarter of the year, and we expect a similar level of cash flows in the fourth quarter, so we'll reach our target of DKK 1.1 billion-DKK 1.3 billion for the full year. Sometimes we are very occupied about the current trading, in order to estimate whether we're doing good or bad, in our business. So we now have taken a look at the longer-term trends. This is on the third quarter results on the EBITDA margin. And what we can see here is basically, if we look at it, over a longer time period since 2018, we have delivered margin improvements both in all our divisions and of course then also in the group.
We of course aim to continue doing so, in the years to come. There has been, dynamics and developments around it. We have talked about our European branded business, as one where we still have much work to do. But we have also seen that the online and retail business has recovered, quite a lot and is on a growth track once again. And that leaves me to just conclude, shortly on the outlook. Again, we do believe that we can deliver DKK 8.7 billion-DKK 9 billion in net sales for the full year. That requires that we grow in the fourth quarter, but we expect that the trend of the online business will continue, as we have seen in the past quarters.
But we also believe that we will see a more stable situation in our European branded business, and then we have the contribution from our Growth Enablers. On the margin side, we expect around 24% for the year. We have delivered more than 24.6% for the full year, so we do expect to see a margin decline in the fourth quarter. That is driven by investments in our kind of, let's call it, regain of our positions in European branded machine-rolled cigars, but it's also investments in our new growth categories. And then I just talked about the free cash flow. This will conclude kind of the formal presentations for our side. Now, we will have time for Q&A, and I can just look at my watch.
When it came to the finances, we were not quite as efficient as we were in the first part of the presentations, but I think we can cope with that. I can see we already have a number of questions from the live stream, so I suggest we start with one of those. I think this is maybe for you, Jesper, the first one. Is your current manufacturing footprint, i.e. 12 plants, optimal, or do you see any further reduction consolidation of these?
Good question, Niklas. So as I said, we constantly work with evaluating our footprint, and you can say for our side, there are areas where we're actually looking at whether we need to add capacity, because we can see that we are growing in some of the areas, for our manufacturing footprint. There are also areas that we're looking carefully at, as to whether or not at some point in time, we would need to take a decision on our manufacturing footprint. So far, not anything that is, that is on the table for now.
We're also looking at some of the new categories where we can see from the, the competitors that we have, is that at some point in time, when we grow that category to a certain level, then it becomes attractive actually to start to do the manufacturing yourself, instead of having it done by a third party. So all of these are the combinations that we're making, and you would always see that our manufacturing footprint does not remain static. As Niels said, we are in a position where if we do not find emerging positions, do not find these pockets of growth, we will need to look at also doing changes within the area of our manufacturing footprint. But so far, nothing on the table right now.
Okay. Thank you, Jesper. Now we have one for you, Régis. What innovation is planned for our international handmade cigars for 2024?
Maybe this one is a question online from one of our competitors. So, the marketing teams are always working on innovation plans. So they actually have a three years innovation plan, and it's tailored to every single brand. So I'm not going to go into exactly which launch we're going to do, but rest assured, innovation is part of our DNA in handmade cigars, and that will also be for international markets. On top, we will also roll out fully the Alec Bradley acquisition internationally. We have terminated the former distributors, and we're integrating it fully into our own setup in the beginning of next year.
I think maybe the next question could also be for, for you, Régis, because we have one here, basically saying that we have talked a lot about our nicotine pouches, but said very little about our hemp product, Versa. So, how is this basically performing?
Yeah, I think Versa Hemp, we of course launched about two years ago in the U.S. W e said this was also an experiment, and we are trying to conquer the market. In all fairness, it is behind on expectations. So, we're evaluating what the movement forward is. It's very much the distribution game is a little bit behind, but the rotation in the store where we are present is actually okay. So it is a continuous development, and we evaluate it, evaluate on a continuous basis.
Okay, thank you. And then I think we have a question for you, Niels, on regulation. And that's basically about U.S. deeming regulation under the FDA impact your ability to innovate and launch new product in the market. So when is it realistic to assume FDA regulation of cigars could be removed? What's the status here?
Yeah. First of all, let's make sure we distinguish correctly. What has happened in the U.S. is that the judge has overruled all on the right for the U.S. government to regulate handmade cigars. So they basically said, you know, the government said we have to regulate all cigars, including handmade cigars. Now, they have said, "Handmade cigars, you made mistakes. It should not be regulated by you." Now, FDA has chosen to appeal this decision, but they've also chosen not to execute a stay order, which basically means that now everyone continues as if there will be no successful appeal, because otherwise it would be very difficult, let's say, one or two years down the road.
So right now, the situation is that we do not expect FDA restrictions to how we operate and market our handmade portfolio in the U.S. So it means that there are no needs for blends to be predicate. There is, in principle, potentially down the road, also not a need to pay user fees. And, and, and all these aspects will open up for a different competitive scenario, but they will also open up for the debate about a new timeline for when FDA may again resume the regulation of handmade cigars, because we still believe that they would do that eventually. The question is, is that five? Is it seven? Is it 10 years from now? We don't know, and I keep reminding people that FDA has made it very clear that this is the lowest of all their priorities.
They have many other things to deal with.
Okay. Thank you, Niels. Any questions from the room? I can say that after the formal part here, still remember we have Sean, that is very eager on telling you a little bit about our premium cigar products on the terrace just outside here. So I know that is not really tempting you to ask questions now. Yeah, Jerry?
Could you give us a sense of where the M&A outlook looks, where it is now compared to 12 months ago, or just give us a sense of the general pattern of the market? Thank you.
Yeah. I think that quite a while we've seen more activities in the M&A area, but as we also keep saying, is that activity doesn't necessarily mean transactions. But I think more people are thinking about whether it's right to retain ownership of their businesses or not. But I also think that, you know, evidence shows that we made some transactions, but we are also not making transactions at any cost. So we're trying to stay disciplined, but I would say that there are more movements in the market than there's been. But, you know, still we are not standing here with five acquisitions, right? So, yeah.
Thank you. Any more? It doesn't seem to be the case. Then I think we will conclude this second Capital Markets Day for Scandinavian Tobacco Group. First of all, thank you very much for all of you that has been listening in from the live stream, and thank you all for your questions. Thank you also for your joining us here in London at The Ned. It has been a pleasure for us to talk more about our company and giving some insights. So we hope it has been valuable for all of you. And thank you very much, and goodbye.