Thank you. Yes, I'm Torben Sand, and I'm head of Investor Relations of Scandinavian Tobacco Group, and I am, as usual, joined by our CEO, Niels Frederiksen, and CFO, Marianne Rørslev Bock. The agenda for this webcasted conference call is first, a few highlights for the second quarter of 2022. We will turn quickly to the background and further insights for the revised guidance that we communicated on the 21st of August. We will then have an overview of the performance in our three commercial divisions, followed by key financial developments for the group, including an update on capital allocation. We will, as always, have a Q&A session by the end. Before we start, I will, however, ask you to pay attention to our disclaimer on forward-looking statements in the end of this presentation.
With this, please turn to slide number three, and I will leave the word for Niels.
Thank you, Torben, and welcome and good morning to everyone on the call. It has probably already come to your attention that we, on Sunday evening, on the August 21st, pre-announced key financial data for the second quarter, and at the same time, we revised our full year 2022 guidance for organic EBITDA growth. Before going into details for the reasons for the revised guidance, I'll give you a few highlights from the results announcement. Net sales were DKK 2.278 billion with an organic decrease of 1.8% versus last year. EBITDA before special items was DKK 544 million, with a 14.6% negative organic growth. Free cash flow before acquisitions was DKK 143 million versus DKK 434 million last year.
Adjusted earnings per share was DKK 3.6 versus DKK 4.1 a year ago. The result for the second quarter was below our expectation, and the need to revise the guidance is disappointing, but it should not change the focus from the fact that Scandinavian Tobacco Group remains a very strong and robust company. The revised guidance is primarily driven by what we still consider to be a temporary problem in our supply chain, one we need to solve and one that we remain confident that we can solve. I will now move directly to the revised expectations for the year, so please turn to slide number 4. As mentioned just before, the primary reasons for the revised EBITDA guidance is the lower-than-expected productivity in our supply chain. This has resulted in lower production volumes, more temporary labor, and therefore higher costs.
As a result, the level of the production backlog has not been reduced as planned, and it was almost DKK 150 million by the end of July. This has impacted the financial performance in the second quarter and continued into July. The external factors affecting us have changed over time, but relate to issues such as availability of temporary labor, COVID-related illness, material shortages such as cardboard, delays in shipping of key materials such as tins from China, longer lead times from suppliers, general shipping disruptions, and more lately, strikes in Belgium over increased costs of living. The external factors are a number of incidents which individually does not have a material impact, but combined and over time have been highly disruptive.
The internal factors relate primarily to the transition of production from the factories we have closed in the Netherlands and moved to Belgium, and a slower-than-expected ramp-up in productivity. We have been challenged by the increased complexity coming from adding the Agio portfolio, and once we fell behind on the tail of the portfolio, it has proven difficult to catch up. We've had to add more people and more shifts to deal with the issues, and that has a cost impact. In many ways, we feel that we've seen an almost perfect storm against our productivity ambitions for 2022. We do expect to see improvement in the second half of the year, but the delay in getting the productivity to the planned level will impact full year net sales and costs negatively.
Also impacting our full-year expectation, but to a lesser extent, is the impact from the handmade cigar consumers in the U.S. becoming more cautious. As a combination of the two issues, we have revised our expectation for organic net sales growth for the group from positive to about zero. Pricing across most categories has been strong in the quarter, partly offsetting increasing cost inflation. With the improvements in the supply chain productivity kicking in along with the further pricing initiatives and easier year-on-year comparisons, we do expect to return to EBITDA growth in the second half of the year. With this, please turn to the next slide.
Now based on the development in the first half of the year and the outlook I have just described for the second half, the updated expectations for 2022 are: organic EBITDA growth in the range of -4%-0%, previously 0%-6%. Free cash flow before acquisitions in the range of DKK 1.1 billion-DKK 1.4 billion is unchanged. Adjusted EPS increase remains unchanged at more than 5% despite the lower EBITDA guidance as a result of the increase in the US dollar exchange rate versus Danish kroner. Please turn to slide number 6. Now, 2022 has turned out to be a more challenging year than we expected. We will deliver results below our financial ambition of 3%-5% average annual organic EBITDA growth.
However, I would still like to remind everyone that 2022 compares to exceptionally strong growth in 2020 and 2021, and we continue to track well above pre-COVID levels. Nothing in these latest developments have made us less convinced about our long-term financial performance or, sorry, financial potential. We are confident that we will solve the backlog issues, and we will reach the planned level of productivity in our supply chain. Despite seeing weakness in the consumption of handmade cigars in 2022, the category has clearly benefited from the change in consumer behavior during the pandemic. Now, this has forced us all together to be even more ambitious in our strive to optimize price management. A success criteria I've talked to before, and part of the challenges we have in the productivity stems from the complexity in our product portfolio, another of our strategic focus areas.
We continue to focus on implementing our strategy rolling towards 2025, and the acquisition of the handmade cigar company Room101, the continued expansion of our retail network, the rollout of our sustainability strategy, and our investment in SAP S/4HANA are good examples of this. Finally, I would like to draw attention to the strength of our cash flow generation. Despite the challenges we've been facing in the year, the expectation for generating a free cash flow before acquisitions of more than DKK 1.1 billion is unchanged. Now, we will turn the focus to the performance of divisions, and I'll hand the word over to Marianne Rørslev Bock. Please turn two slides forward to page eight.
Thank you, Niels. I will start with the overview with Europe Branded. Net sales for the second quarter increased by 4% to DKK 721 million. Organic growth was positive by 2%, and the acquisition of Moderno Opificio del Sigaro Italiano, also called MOSI, contributed with another 2% to reported growth. Pricing remained a key driver for all product categories. As an example, I can mention that the price mix impact for machine-rolled cigars was up by almost 6%. Gross profit before special items was unchanged at DKK 373 million compared to the same quarter last year, while gross margin decreased by 2.1 percentage points to 51.7%. EBITDA before special items was DKK 173 million, with an EBITDA margin of 24% versus 27.6% in the second quarter of 2021.
The gross margin development was primarily driven by lower supply chain productivity, whereas OpEx ratio increased due to increasing expenses for, among others, freight and distribution. For the quarter, the market share index was 30.5% versus 32.9% in the second quarter of last year and 31.5% at the end of 2021. The decline in market share is primarily driven by France and the Netherlands. Our assessment remains that the market share development is driven by the supply chain issues that we have experienced since the third quarter of 2021. Now please turn to the next slide. Looking ahead, we continue to see the structural decline rate in machine-rolled cigar volume at about 3%, with variations from year to year.
We remain committed to regain market share driven by our strong brand portfolio, and we will improve supply chain productivity, which will pave the way for limiting the impact from market-driven volume decreases. With a dedicated focus on price increases, we expect the division will deliver positive long-term organic net sales growth. In addition to price increases, simplification initiatives are expected to support long-term margin expansion. Pricing will already be a driver for improving margins in the second half of the year, whereas simplification initiatives will be an additional long-term driver. With this, now please go to slide 10, where I'll turn to the division North America Branded and Rest of World. For the second quarter of 2022, net sales in North America Branded and Rest of World increased by 8% to DKK 819 million, driven by the positive development in the US dollar.
Organic growth was slightly negative by 1%. This quarter, organic net sales growth was driven by declining volumes across most product categories, almost fully offset by strong pricing, both for handmade cigars and smoking tobacco products. The recovery in global travel retail continued and the change in distribution model in Australia, going from own sales force to a distributor model and stronger sales in contract manufacturing, supported the net sales development in the quarter. Gross profit before special items decreased by 1%, with the gross margin declining from 55.4%- 50.8%. The negative margin development is driven by a normalization of market and product mix following two years of mixed benefits during the COVID pandemic.
EBITDA before special items was DKK 305 million, with an EBITDA margin of 37.2% versus 40.9% in the same quarter last year, primarily driven by the gross margin development. The OpEx ratio decreased from 14.5%- 13.6%, primarily due to the change of distribution model in Australia. Please turn to the next slide. After the first quarter, we said the consumption of handmade cigars in the U.S. had peaked in the beginning of 2022, and were trending lower towards the long-term structural volume decline rate of about 2%. During the summer months, and particularly in July, we have seen a further decline in consumption as consumers have become more cautious. As a result, we now expect the market for handmade cigars to decline more than 2% this year.
However, focused price management and strategic initiatives, like the launch of the Forged Cigar Company, are expected to continue to support net sales for handmade cigars. In the second half of the year, the organic net sales performance will reflect a dampening of the handmade cigar market, just as the normalization of product and market mix for other product categories will be visible in year-on-year organic growth rates. I will now turn the attention to the performance in our North America Online and Retail division. Net sales for the second quarter increased by 5% to DKK 737 million, with a negative organic growth of 8% and a positive contribution from exchange rate development of 12%.
The online channel experienced a 12% decline in the active customer base versus the second quarter 2021, driven by lower traffic across our various e-commerce platforms, but still 6% stronger than pre-COVID levels. The retail channel delivered 18% growth in net sales, driven by our new store gaining traction in the market. The retail segment accounts for about 8% of divisional net sales. Gross profit before special items increased by 3%, though with gross margin decreasing slightly from 39.4% to 38.7%. EBITDA before special items decreased to DKK 101 million from DKK 132 million last year, with an EBITDA margin of 13.7% versus 18.8% last year.
The development in EBITDA margins relates to lower organic net sales, a continued high level of competition in the online channel, increased IT expenses, as well as higher distribution costs. Please turn to the next slide. The increased caution among consumers on the back of the macroeconomic developments and uncertainties constitute a downside risk to the overall consumption of handmade cigars in 2022. We have built caution into our expectations for the full year net sales outlook. In combination with a continued high level of competition in the online channel, the opportunities for offsetting declining volumes with the price increases are limited. Further, given the current cost inflation, we expect margins to remain under pressure for the remainder of the year. Long-term growth in North America Online and Retail will come from investments in consumer insights and the continued expansion of the brick-and-mortar retail channel.
We remain confident that a substantial part of the current active online customers can be retained, and we will continue to add superstores to our retail network. We believe the division has a strong foundation for future growth. Following the opening of the new superstore in San Antonio, Texas in April, we plan to open another 5-7 cigar superstores in the US in the coming 2-3 years. Now please turn to slide 15. Let me now give you a few more details to the financial performance from a group perspective. In the second quarter of 2022, reported net sales increased by 6% to DKK 2.3 billion. Gross profit before special items was unchanged at DKK 1.1 billion, and EBITDA before special items decreased by 10% to DKK 544 million.
Organic growth in net sales was negative by 1.8%, and organic EBITDA growth was negative by 14.6%. For the half year period, organic net sales growth was negative by 1.7% and organic EBITDA growth was negative by 9%. The stronger USD exchange rate development had a significant positive impact on reported numbers also in this quarter. Reported net sales was impacted by DKK 150 million or approximately 7%, and reported EBITDA before special items was impacted by DKK 26 million, equal to about 4%. As I mentioned in the divisional update, Europe Branded delivered positive organic net sales growth, whereas North America Branded and Rest of World, as well as North America Online and Retail, delivered negative organic net sales growth in the second quarter.
For the group, the reported gross profit was composed by 2.5% decrease in the gross margin to 47.2%, offset by exchange rate developments. The margin decline was primarily driven by a normalization of product and market mix in North America Branded and Rest of World. The group's OpEx ratio increased from 21.6% in the second quarter of last year to 23.3% this year, driven by an increase in general cost inflation, travel, consultancy fees, and IT expenses. Special items were almost unchanged versus last year by DKK 23 million, mainly driven by the ERP project, One Process. The expectation of total special items for the year has been revised to about DKK 0 from DKK -100 million as a result of gains from sale of property.
Net profit for the quarter decreased by DKK 66 million to DKK 310 million. Adjusted earnings per share at DKK 3.6 per share compared with DKK 4.1 per share last year. The free cash flow before acquisitions was DKK 143 million versus DKK 434 million in the second quarter of last year. The cash flow development is driven by the operational performance as well as the changes in working capital, the latter mostly related to receivables. The cash outflow from working capital was DKK 124 million versus an inflow of DKK 59 million in the second quarter of last year. As Niels explained under the expectations for the full year, we remain confident we will deliver a cash flow before acquisitions in the range of DKK 1.1 billion-DKK 1.4 billion this year.
For this, please turn to the next slide. I will now briefly talk about our net debt and leverage position. During the second quarter, the net interest-bearing debt increased by DKK 1.002 billion to DKK 4.268 billion. The increase is driven by the appreciation of US dollar and our capital distribution of DKK 192 million in share repurchases and DKK 692 million in dividend payments. The leverage ratio increased to 2x compared with 1.5x at the end of 2021. However, the increase is caused by the calculation of US dollar debt at current values, whereas the denominator, the 12 months EBITDA, is based on reported EBITDA at lower U.S. rates. We consider our financial position as strong and supported by our strong annual cash flow generation.
We remain committed to a disciplined capital allocation policy. This concludes our presentation for today's call, and I will hand the word back to the operator, and we are ready to take any questions you may have.
Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one and one on your telephone. We are taking our first question, so please stand by. The next question for Niklas Ekman from Carnegie. Please go ahead.
Thank you. Yes, a couple of questions from my end. Firstly, a question on this new guidance that you provided. On the one hand here, you talk about how the lower guidance is mainly due to temporary supply disruptions. But on the other hand, you mentioned several times in the presentation and in the result statements, you talk about the cyclicality of U.S. cigars. You talk about mean reversion to pre-COVID patterns. And of course, you have benefited strongly from COVID and the increased consumption. The temporary supply disruptions, that sounds like a relatively small issue, while the other sounds like a more lasting negative issue. I was wondering if you could maybe clarify why you say that this is temporary, while on the other hand, acknowledging both cyclicality and a mean reversion post-COVID.
Yes. Thank you for the question, Niklas. I think it is important to say about the U.S. handmade weakening is that it's something we're calling for 2022. We can see that consumers are more cautious on the back of, you know, increasing food prices, petrol, energy, across many categories. We are not, you know, we are not certain whether this will continue into 2023 or not. It depends a lot on the macroeconomic situation. For 2022, we are certainly seeing an impact on consumer behavior. I think that what we are saying there is that right now we can see into 2022, we cannot see beyond that.
It's not, and that's maybe the critical question. This is not reflecting a change in our perception of the consumers that have been added under COVID, stopping to smoke again. That's not what we are saying. We are basically saying people are spending more cautiously. When it comes to the new guidance and the main effect being the supply chain issues, it's important to understand that the supply chain issues affect us in two ways. It affects us in the form of higher than expected cost of operation, but it also affects us in the form of, let's call it, sales not being invoiced plus a lower ongoing performance of especially our Europe Branded division, but even to some degree, some of the export markets in the North America Branded and Rest of World. It is a combination of things.
When we fix the backlog issues, we do believe that we will see some of this market share coming back, but we can always debate to what degree that will materialize.
Okay. Thank you for clarifying that. Is there anything more you can say about current trading? Because you talk about how July you saw demand in U.S. cigars deteriorating further. Can you say anything about the magnitude? Given that we are now at the very end of August, is there any signs of that reversing again in August, or are you seeing a similar trend in August as in July?
Let me try and answer that, Niklas. Let me first talk about July and also the impact on the revised guidance. As Niels already said, the revised guidance is primarily driven by our supply issues. We were expecting benefits coming out of our focus on supply chain, but those benefits did not materialize during July. That was a very important month for us to see it materializing. That's why we lowered the guidance. On the sales trending in the various markets, we've seen a softening of the U.S. market during July, and we are seeing that softening also continuing into August. Otherwise, the sales trends that we see are impacted by the backlog and then the softening in the U.S.
I hope that answers.
Yes. Thank you very much. Also just to clarify, your margins have appreciated very strongly during the past 2-3 years. You had EBITDA margins of around 20% in mid-2019, and you ended last year with margins about 27%. Is there any way you can quantify how much of this is related to a structural shift in consumption, and how much of that is related to the M&A synergies and just cost efficiencies? Is there any way of trying to break that down?
Let me try to talk about the first half year and the decline in EBITDA margins. The decline in EBITDA margin is very much driven by our OpEx cost. If I should talk to that increase, I think you should think of it as investing into our future. There's of course been some increases compared to last year in OpEx, like more travel, but where we have seen an increase is in IT costs because we are digitalizing more, and also in the consultancy fees because we are getting advice again to drive performance and simplification. When we look at the EBITDA margin going down, I look at it very much as an OpEx part.
I think also, Niklas, it's important still to remember kind of that we had an exceptional positive impact in our Rest of World business, driven by the COVID situation. For instance, as we have talked about the Norwegian market moving back to domestic sales, which is quite lucrative compared to kind of the normalization of those sales. There has been different pockets of the very profitable movements that now is turning back.
Exactly. That's what I'm curious about. Is there any way that we can quantify this effect? What would have the normal margin been if we assume that part of the increased consumption is structural, but then you have some exceptional effects that have boosted the margin temporarily? Would we be talking about a margin somewhere in between the pre-COVID margin and the peak margin during COVID? Is that the kind of margin trend you expect to see, or do you really think that you can sustain the margin level we're seeing at the moment?
I would answer this way. You have to go back to 2019, and the margins that we had from 2019 has to be strengthened both by synergies but also by our focused price management.
Okay. Fair enough. Thank you so much for taking my question.
Thank you for your question. We are now taking our next question. The next question from Gaurav Jain from Barclays. Please go ahead.
Hi. Good morning. You know, a couple of questions from me. First is on your guidance. You are assuming an improvement in 2H over 1H, and I do appreciate that your growth rate in 2H 2021 was lower than in 1H 2021. We can argue that the comps are easier. If I look at two-year comps, because you know, 2020 had all sorts of weird patterns because of COVID, and if I add the growth rate in 2H 2020 and 2H 2021, it is almost, you know, 8%, i.e. 4% per annum, which is higher than your sustainable revenue growth rate. Do you really think your comps are easier in 2H 2022?
I think that it is important not to attach too much importance to the historic comparisons on a quarter basis. There is, in our industry, movements between the quarters that is driven by price increases or excise increases. Especially the fourth quarter can be a difficult quarter to assess. What we have done and what we put into the guidance is of course our best estimate for the remainder of 2022, and I think that is what you should be, let's say, paying the most attention to. We have of course gone through each division. We've looked at the outlook on the total market, and we've looked at the activities of the different divisions, and this is the basis for the guidance.
When it comes to Europe, like clearly there is a big concern because of gas prices and cost of living concerns. Have you tried to factor any consumer weakness in 2H 2022 into your guidance?
We have factored consumer weakness into our guidance. I think that we are seeing more impact or relatively more impact so far in the U.S. from the macroeconomic development than we are seeing in Europe. For example, a country like the U.K. does seem to be more affected by the macro developments right now when we look at the European than some of the other countries.
Would you see any impact on your manufacturing costs because of, you know, this gas shortage and electricity prices increasing? What could be the potential impact? Like, can you quantify what your electricity costs or energy costs in your business?
I think it's worthwhile knowing that our electricity costs or energy costs is not significant. Even with a large increase from inflation, it is not significantly impacting our numbers.
Okay, sure. Thank you.
Thank you for your question. As a reminder, if you wish to ask a question, please press star one and one on your telephone. There are no more questions at the moment. I will hand back the conference to Mr. Sand for closing remarks.
Well, okay. I will thank everyone for listening in and for asking questions, and wish everyone a continued good day.