Good day, thank you for standing by. Welcome to the Scandinavian Tobacco Group full year 2022 results webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star 11 on your telephone keypad. You will hear an automatic message advising your hand is raised. To withdraw your question, please press star 11 again. Alternatively, you can submit your questions via the webcast. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Torben Sand. Please go ahead.
Thank you. Welcome to Scandinavian Tobacco Group's fourth quarter and full year 2022 webcasted conference call. My name is, as said, Torben Sand. I'm Director of Investor Relations and Group Communications. As usual, I'm joined by our CEO, Niels Frederiksen, and CFO, Marianne Rørslev Bock. Now, please turn two slides to slide number three for the agenda. The agenda is first highlights for the fourth quarter and full year of 2022. We'll follow up with a business update. We'll focus on our strategy Rolling Towards 2025, including our road ahead for growth through acquisitions, growth through new product categories, and our progress in our sustainability agenda. These insights will be followed by an overview of the performance in our two commercial divisions, key financial developments for the group, including an update on net debt and leverage, as well as capital allocation.
Before concluding with an update on the guidance, including the new guidance metrics for the full year of 2023, we will conclude with a Q&A session where we will be more than pleased to take any questions you might have. Before we start, I will ask you to pay attention to our disclaimer on forward-looking statements in the end of this slide presentation deck. Please turn to slide number 4, I'll leave the word to Niels.
Thank you, Torben. Welcome and good morning to everyone on the call. I want to start off by highlighting the fact that 2020 and 2021 were two exceptional years where our company delivered a strong financial performance with solid growth in net sales and profits, resulting in our best ever EBITDA margin and free cash flow generation in 2021. 2022 became, for reasons you all know well, a more challenging year. Regardless, I believe we delivered a solid financial performance with only a slight setback versus the exceptional 2021. However, results were in line with our expectations as communicated in August and reiterated in November last year. Before going into details with the progress on our strategy Rolling Towards 2025, I would like to give you a few key financial highlights from the fourth quarter results announcement.
Net sales were DKK 2.2 billion with an organic increase of 1.7% versus last year. EBITDA before special items was DKK 563 million with a 13% organic growth, resulting in an EBITDA margin of 25.8% versus 23.5% last year. Free cash flow before acquisitions was DKK 530 million versus DKK 307 million last year. Adjusted EPS came in at DKK 4.4 versus DKK 3.1 in the fourth quarter of last year. As we expected, the fourth quarter delivered good growth, supporting our full year expectations. Marianne will give you more details on the full year performance in a moment.
On the back of the financial results, the board of directors propose a 10% increase in the ordinary dividend per share to DKK 8.25 per share. Now please turn to slide number five. In a minute, I will talk to our Rolling Towards 2025 strategy, but before doing so, please allow me a minute to talk about the strong financial performance we have delivered over the past five years. We have increased the size of the company by more than a third, measured by net sales. The EBITDA margin has improved from around 20% to more than 25%. The organic EBITDA growth has on average been 8% per year, and the free cash flow before acquisitions has almost doubled.
The compounded average growth rate in earnings per share has been 21%, and the return on invested capital has improved from around 6%-7% to more than 14%. We have allocated about DKK 4.7 billion to our shareholders, either as dividends or as share repurchases. We believe this is a strong testimony to the value of the transformation the group is undergoing and the results we've delivered in the past years. However, we intend to continue pushing ahead, and we have high ambitions also for the years to come. We intend to grow the size of the business, to increase EBITDA margins and return on invested capital over time, and as a consequence, to deliver continued positive average annual organic EBITDA growth.
Now please turn two pages to slide seven, and I will talk into the way forward for how we intend to continue to deliver on our ambitions. Let me start by with providing an update on some of the many interesting strategic initiatives we are working on. Each project we progressing is ultimately feeding into our vision of becoming the undisputed and sustainable global leader in cigars, all in parallel, enabling growth to strengthen the long-term opportunities for the company. We aim to grow the company through a combination of additional acquisitions, as well as the growth opportunities that exist in the expansion of our U.S. retail network and further experimentation in next-generation products. I'm very pleased to say that we delivered on all of these in 2022. Mergers and acquisitions remain embedded into the business structure.
In 2022, we acquired Room101, a well-known brand in the boutique segment of the premium cigar market in the U.S., and include brands such as Payback, Doomsayer, and many more. Last month, we acquired the Alec Bradley cigar business, a leading brand in the U.S. Premium handmade cigar space with brands like Prensado, Kintsugi, Alec Bradley Double Broadleaf, and many more. Through this bolt-on acquisition, we will expand our portfolio of highly regarded premium brands in the U.S. and internationally. Alec Bradley sold almost 10 million cigars last year with total annual sales close to DKK 200 million and an EBITDA margin which is in line with our group EBITDA margin. The transaction price is about DKK 500 million and is expected to be EBITDA margin, EPS, and ROIC accretive when fully integrated.
Now please turn to slide number 8. In the next generation product category, we aim to leverage our agility, our consumer insights, and our distribution capabilities to explore growth opportunities in this space that will complement our core categories and will allow us to evolve with the ever-changing demands and trends of our consumers. Diversifying our portfolio will allow us to widen our consumer base and provide the strategic opportunity to embrace the harm reduction agenda. In September, we launched STRÖM, a nicotine pouch in the modern white category in Sweden and in Manchester in the U.K., and we are pleased with the initial reaction by consumers and its performance to date. Please turn to slide number nine. I will now say a few words about the progress we're making on the implementation of our ambitious and comprehensive sustainability strategy, Rolling Responsibly.
In 2022, we laid solid foundations for many initiatives and goals that will lead us toward a net zero future and allow us to continue to be sustainable community pioneers. We made a formal commitment to the Science Based Targets initiative, reduced our Scope one and two emissions from 2021, and established a dedicated sustainability function within the company to be the driving force behind our ESG efforts. We've set a number of ambitions for 2023, including further reduced emissions, additional community initiatives, and we will increase the standard of our ESG data in preparation for the CSRD. I look forward to updating you on these throughout the year. Now we will turn to the focus to the performance by division, and I'll leave the words to Marianne. Please turn two slides to slide number 11.
Thank you, Niels. I will start the overview with Europe Branded. Net sales for the fourth quarter increased by 5% to DKK 731 million. The growth impact from acquisitions was about 2%, and the underlying organic growth was 2.4%, driven by all product categories. Pricing remains a key driver. In the largest product category, machine-rolled cigars, which account for almost three-quarters of divisional net sales, most markets delivered negative volume growth. However, as in previous quarters, pricing more than offset the volume decline. EBITDA before special items was DKK 209 million, with an EBITDA margin of 28.6% versus 24.4% in the fourth quarter of 2021.
The improvement is driven by a significant reduction in the OpEx ratio as a result of general cost reductions and cost efficiencies, more than offsetting a decrease in the gross margin. The market share index has stabilized at 30.8% versus 30.9% in the third quarter. For the full year, the market share index was 31.1%. This implies that the loss of market share since 2021 might have come to a stop. Our key priority remains to drive pricing rather than to gain volume share to offset the underlying cost inflation. For the full year, organic net sales was slightly positive. The EBITDA margin improved marginally from 27.6% in 2021 to 27.7% in 2022.
The structural decline rate in machine-rolled cigar volumes is still anticipated to be in the level of -3% per year, with variations from year-to-year. For 2022, the volumes declined by an average of 2% in Europe. We remain committed to regain market share over time, driven by our strong brand portfolio. However, in the current circumstances, the key priority is to offset cost inflation and volume decline by pricing. Additional levers for Europe Branded to deliver margin improvements is our simplification initiatives to reduce the number of stock keeping units and brands in the portfolio. The initiative progressed well in 2022, and we expect to simplify further in the years to come. Finally, I would also like to mention that STRÖM, the nicotine pouch product Niels talked to, will add to net sales during the launch in Sweden and to U.K..
With this, now go to slide 12, where I will turn to the North America Branded and Rest of World. For the fourth quarter of 2022, net sales in North America Branded and Rest of World increased by 15% to $751 million, partly driven by the development in the U.S. dollar and partly driven by 7% organic net sales growth. Organic growth was driven by strong pricing, both for handmade cigars and smoking tobacco products. Good volume growth in handmade cigars in our international markets, as well as for fine cut tobacco. A continued recovery in global travel retail, whereas the decision to cease sales in Russia and Belarus impacted sales negatively. EBITDA before special items increased by 24% with an EBITDA margin of 35.5% versus 32.9% in the same quarter last year.
The gross margin declined due to the return to pre-pandemic market and product mix, whereas the increase in the EBITDA margin was a result of lower OpEx ratio, driven by general cost reductions and the change of distribution model in Australia. For the full year 2022, organic net sales was 3% with the EBITDA margin coming off to 38.4% from the exceptional high level of 39.5% in 2021. A continued adverse margin impact from changes in product and market mix is expected in 2023. We estimate the consumption of handmade cigars in the U.S. decreased a little more in 2022 as compared to the structural decline rate of about 2%.
Currently we don't see any major changes to underlying consumer behavior compared to its long-term trend, with consumption for handmade cigars having been resilient despite two years of exceptional growth in 2020 and 2021. With the acquisition of the cigar business, firstly from Room101 and recently from the Alec Bradley cigar business, we continue to build on our strength and to aim for becoming the undisputed and sustainable global leader in cigars. Both the Room101 and the Alec Bradley brands can leverage our position not only in the U.S. market, but also internationally. The increased focus on growth enablers, like the new product launches in next generation product categories, are also expected to be part of the long-term organic growth for the division. I will now turn the attention to the performance in our North America Online & Retail division.
Please turn to slide number 13. Net sales for the fourth quarter increased by 7% to DKK 770 million, driven by the strong U.S. dollar. Organic net sales decreased by 5%, which is slightly lower than the decline rate in recent quarters. Online continued to experience a double-digit decline in the active customer base versus the same period of previous year, with the decline being driven by lower traffic across most of our online platforms. Retail delivered solid double-digit growth in the net sales, driven by the impact from store openings, including our new store in San Antonio, Texas. Retail share of divisional net sales increased to almost 9% for the quarter. EBITDA before special items decreased to DKK 117 million from DKK 125 million last year, with an EBITDA margin of 16.7%.
Although the margin continued to be lower versus the same quarter last year, it improved compared to previous quarters in 2022. The development in EBITDA margin relates to the lower organic net sales, a continued higher level of sales related to expenses and promotional costs versus 2021, and the short-term impact from store openings. The temporary challenge for North America Online and Retail remains the delayed shift back to online from retail in the market. However, we remain confident the balance over time will move back to pre-pandemic level, with consumers purchasing up to 60% of their cigars online. In April 2022, we opened a new superstore in San Antonio, Texas, and in February this year, we opened store number eight in Conroe, Texas, just outside Houston. We plan to open more stores in the U.S. in the coming years.
The pathway to resume growth in net sales and improve EBITDA margins over time is firstly to increase volumes by regaining traction in the number of active consumers on our web platforms. This would be supported by the opening of our sixth web platform, Cigora.com last year. Secondly, to continue the expansion of our cigar super stores. As I just mentioned. Thirdly, to deliver sufficient price increases to offset cost inflation, as well as to continue to improve cost efficiency in our operation. Turn two slides to slide number 15, please. Let me now give you a few more details to the financial performance from a group perspective. As Niels addressed in his opening remarks, we delivered solid growth during the fourth quarter of 2022 in both reported and organic net sales.
The EBITDA margin improved by more than two percentage points to 25.8%, and the free cash flow before acquisitions improved by more than DKK 200 million - DKK 530 million. The organic growth in net sales of 1.7% was composed by positive growth for North America Branded & Rest of World, as well as for Europe Branded, whereas growth remained negative for North America Online & Retail. The stronger U.S. Dollar exchange rate had a significant positive impact on reported numbers also in this quarter. Reported net sales was positively impacted by $121 million or approximately 7% as reported EBITDA before special items was impacted by $26 million, equal to an almost 6% positive impact.
The gross margin decreased by 1.3 percentage points to 47.7%, whereas the EBITDA margin improved by 2.3 percentage points following an improvement of OpEx ratio 25.4% to 21.9% in the fourth quarter of 2022. The decline in gross margin was driven by all three commercial divisions, whereas the improved OpEx ratio was a result of general cost reductions and the change in distribution model in Australia. Special items were positive with DKK 103 million as a result of a DKK 134 million income relating to the sale of properties in the Netherlands. Expenses for One Process Project, our ERP project of DKK 25 million partly offset this gain. The improvement of cash flow is driven by the operational performance, lower taxes as well as special items paid.
Changes in working capital impacted the cash flow positively by DKK 58 million versus a DKK 79 million positive in the fourth quarter of 2021. With this, please turn to the next slide. I will now briefly talk about our net debt and leverage position. Since year-end 2021, the net interest-bearing debt has increased by DKK 363 million to DKK 3.6 billion by the end of 2022. The increase is primarily driven by our capital distributions and increased liabilities relating to right of use assets. In the fourth quarter, we repurchased 1.64 million shares at a total value of DKK 212 million, and for the full year of 2022, we have repurchased shares at a total value of DKK 776 million.
Including the ordinary dividend of almost DKK 700 million we paid in April 2022, the total capital allocation for 2022 was almost DKK 1.5 billion, an increase of 17% versus the total capital allocation in 2021. The leverage ratio decreased to 1.6 x versus 1.9 x by the end of the third quarter, but increased slightly to 1.5 x by the end of 2021. Our target remains unchanged at 2.5 x. Please turn to the next slide. In 2022, we allocated DKK 1.5 billion to our shareholders, with almost DKK 700 million paid in ordinary dividends and the remaining close to DKK 800 million as a repurchase of shares in the market.
Still, our leverage ratio remained low at 1.6 x. We consider our financial position as strong. By the end of February this year, we completed the share buyback program we initiated March last year. Our intention was to repurchase shares to an aggregated value of up to DKK 1 billion. In total, we repurchased shares at a value of DKK 776 million. The scope of repurchases has been limited by the daily trading volume in our share across the year in combination with the buyback being executed under the Safe Harbour Regulation. We remain committed to our shareholder return policy, including the ambition to increase the annual payment in ordinary dividend. Consequently, the board of directors will propose a 10% increase in the ordinary dividend to DKK 1.25 per share in the upcoming annual general meeting in April.
This equals a 10% increase in dividend per share. About 4% increase in total dividend payments as the number of outstanding shares is reduced by the share repurchase program. Further, we remain committed to the objective of distributing excess capital to our shareholders based on an ongoing evaluation of and comparison of the projected leverage ratio against the target of 2.5x. The capital distributions will always take into account the potential acquisitions and other liquidity needs. With this, please turn to the next slide for discussion on our expectations for 2023. 2022 was a challenging year and measured up against a very strong financial performance in 2021. We believe the performance in 2022 has been solid, and we have made good progress on our strategy Rolling Towards 2025.
Just a few weeks ago, our vision to become the undisputed and sustainable global leader in cigars came one step closer with the acquisition of Alec Bradley cigar business. We are confident we will make further progress in 2023 on our long-term strategy. It remains key to us to deliver on our vision and our financial ambitions. As of the start of 2023, we are introducing new guidance metrics. We will going forward focus on reported net sales and the EBITDA margin before special items. We believe these guidance metrics better reflect the operational performance in the group. We believe the change will increase the transparency from divisional performance to group level. The financial guidance continues to include the free cash flow before acquisition and adjusted earnings per share.
To reflect our aim to deliver strong financial performance by growing net sales, EBITDA margins, cash flow over time, our financial ambition have been fine-tuned too. Increase EBITDA margin based on net sales and efficiency improvements. Deliver positive average annual organic EBITDA growth. Achieve average annual growth in the free cash flow before acquisitions. Improve return on invested capital. Please note the increase in EBITDA margin is subject to changes in business mix as well as to acquisitions. Now to the outlook for 2023. In 2023, the consumption of our product categories is expected to remain resilient, with price increases being the lever to offset the volume decline. We expect a minor contribution to net sales from the growth enablers, the retail expansion in the U.S. and new product launches.
Including the impact from Alec Bradley and at current exchange rate, the reported net sales is expected in the range of DKK 9 billion-DKK 9.3 billion. The EBITDA margin before special items is expected in the range of 24%-25% compared to 25.9% in 2022. The margin is assumed to be positively impacted by price increases more than offsetting cost inflation as well as improved productivity in our factories. The margin is assumed to be negatively impacted by mix changes between our divisions as well as investments in our growth enablers and sustainability. The EBITDA margin is expected to increase in North America Online & Retail to remain about unchanged for Europe Branded and to decrease in the North America Branded & Rest of World.
The free cash flow is expected to be in the range of DKK 1.2 billion-DKK 1.4 billion, impacted by up to DKK 500 million in CapEx, and the adjusted EPS is expected in the range of DKK 14.5-DKK 16.5, compared with DKK 16 in 2022. The range excludes any impact from potential new share repurchase programs. Based on the financial guidance and the related assumptions, organic EBITDA growth in 2023 is expected to be slightly negative. This concludes our presentation for today's call. I will now hand the work back to the operator and will take any questions you may have. Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Alternatively, you can submit your questions via the webcast. Please stand by while we compile the Q&A roster. This will take a few moments. We're going to take our first question over the phone. It comes from the line of Niklas Ekman from Carnegie. Your line is open. Please ask your question.
Thank you. Yes, I have a couple of questions. Firstly, on this guidance now for 2023, I'm curious on the Sales guidance. I think this requires growth of at least 3%. You have the acquisition adding, but you also have negative currency translation. We're basically talking about organic growth of between 2.5%-6% if my calculations are correct. Can you elaborate a little bit on what you expect to be the main drivers behind this? This would be well above what your organic growth rate has been in most years in the past.
Yes, thank you, Niklas, for the question. You are right about the drivers, both a slightly negative currency impact. The main drivers for the growth that we anticipate in the net sales are coming from strong execution on price increases. Here we have to remember that some of the price increases that we actually did in 2022 will have full year effect into 2023, then we anticipate to do more price increases in 2023. We also have the new Alec Bradley acquisition, as you just mentioned. We have the other growth enablers, especially the expansion of stores in the US. Those would be the main drivers.
Okay. On that last topic, can you talk about how many stores you're looking at opening in 2023?
We, we are not going to reveal the exact number of stores, Niklas, but we have opened the first one in Conroe, Texas, earlier this year, and we have one more scheduled for, first or second quarter. We will expand as we firm up the dates more over the course of the year.
Okay. Good. Can you tell us a little bit about what you're seeing in terms of cyclicality? You've, you mentioned in earlier quarters, you talked about the resumed volume loss, but I think that's more, more an issue of, you know, a post-COVID environment. Can you see anything in terms of cyclicality, in terms of lower demand for your products or down trading or anything like that?
Well, I think that the biggest challenge that we are monitoring is, let's call it the calibration of a new normal between what is traded online versus what is traded in retail. We have seen for quite a while now that retail seems to be continuously stronger than anticipated, and consumers returning to online trading slower than we anticipated. That's one dynamic that we are watching and which we will update you on a quarterly basis. We do see some signs of down trading, but we still feel that the overall demand remains robust. Pricing has also improved in the general market. It does remain under pressure in the online business.
In general, we actually do not see very clear signals of, let's call it cyclical impact on the consumption as of now. What we can see is that many of the companies that have been struggling to supply during 2022 because of the catch up from COVID, they are getting, you know, getting these backlogs eliminated. We are watching very carefully what happens also to the promotion pressure into the trade.
Okay. Thank you. Thank you. That's very clear. On this topic of U.S. online, you mentioned here in the call now that you expected it to come back to around 60%. Am I right to assume that you were at 60% penetration in the US, and then it rose strongly, and now you are below 60%? Is that what you've seen in the US?
That's absolutely correct. We did see, let's call it an immediate boost online in 2020, but it then started to decline already in 2021, and this continued into 2022.
Okay, that's clear. Finally, just a question on buybacks. You don't mention or you don't request any buybacks mandate, but you mention at the same time that your targets for this year are somewhat dependent on future buybacks. Can you just elaborate a little bit here? Why aren't you requesting a new buyback mandate already in the AGM? Are you pausing buybacks temporarily? Is this related to potential M&A?
Niklas, I think it's important for us to say that we are fully committed to our shareholder return policy, both on ordinary dividend and returning excess capital. That could be via the share buyback or an extraordinary dividend. We will both look at our liquidity needs, and then we will over time make a decision on whether a new share buyback will be relevant.
Okay. You mentioned this, and you're also talking about your clear ambition to pursue M&A. Are these two in any way linked to each other?
As I said, we will over time look at our liquidity need and whether we can do a new share buyback program. I don't think I can comment any closer here.
Oh, fair enough. Fair enough. Thank you so much for taking my question.
Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad. Alternatively, you can submit your questions via the webcast. Now we're going to take our next question.
There's no question on the webcast, as of now.
Please, my apologies. We have one more question over the phone.
Go ahead, please.
The next question comes to line from Ting-Fang Dai from Barclays. Your line is open, please ask the question.
Hello, it's Ting-Fang here, asking on behalf of Gaurav Jain. Actually, I have one more question to ask. It's actually on your nicotine pouches offering STRÖM. You say now you are already in the market of Sweden and the U.K.. Is that possible that you can disclose the performance, some performance metrics for the STRÖM product, for example, the sales or volume or the market share? You also mentioned that you are planning to launching new markets this year. May I ask like, how many markets would you like to enter this year, and what market would that be? Thank you.
Yes. Thank you for that question. Again, we are not yet at a stage where we think it's meaningful to reveal any performance data on the nicotine pouches. I think we can confirm that we are of course, monitoring the regulatory development for this category, including what countries it will be relevant to look at. When we do that, we do carefully evaluate our own distribution capabilities up against the market potential. One of the things we talk about when we refer to agility is that we believe that even though we're not big in the category, we can move fairly quickly if we see an opportunity emerge in a particular market where we are also strong. We will be updating you on that as we get wiser. For now, we cannot become more precise.
Okay, thank you so much. For the new market you're planning to launch, is there any information that we can give?
Not yet.
Okay. Thank you. No more question from me.
Thank you. The speakers are now for the questions over the phone.
Okay. Thank you. I think we don't have any questions on the website either, so I assume that concludes the Q&A session.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.