Welcome, everyone. Welcome to Scandinavian Tobacco Group's Capital Markets Day 2025. My name is Torben Sand. I'm Director of Investor Relations and External Communication, and I have the honor of leading you through the next two and a half hours. This is a live-streamed event, and this will be recorded, so you can both download the presentation on our website, and you can also listen in to the recorded version of this Capital Markets event after it has closed off. Back in 2023, we also hosted a Capital Markets Day that centered around the uniqueness of our company. Today, we will build on that, and we will now unfold our new strategy, Focus 2030. Let's now jump to the agenda for the day. First of all, we will have our CEO, Niels Frederiksen. He will unfold the highlights of the strategy.
He will also have reflections for the past five years and explain a little bit on those learnings and experiences that we will carry into the new strategy. We will have Régis Broersma, our Chief Commercial Officer, and he will deep dive into what we call our strategic priorities for the next five years. We will have a small Q&A session in between, and those Q&As will only be from the webcast. It will only be a 10-minute Q&A session. We will have a short break, and Régis will be back, and he will talk into the final of our three strategic priorities. He will give the word to Marianne Bock, our CFO of the company, and she will talk to the financials and the implications of our new financial ambitions in relation to Focus 2030.
When Marianne has concluded, we will open up the floor for a wider Q&A session. We will take questions both from the webcast but also from the telephone conference. Here, we will have a restriction, just so you are aware of it, that we'll take two questions only to begin with, and then you can line up back into the queue, but I will get back to that. I think with these opening remarks, I will leave the floor to Niels.
Thank you, Torben. Thank you, Torben, and welcome to everyone who has joined us here today. We're going to start by talking about our purpose, which is the foundation for everything we do at Scandinavian Tobacco Group. We craft the rituals that make us more. This is more than just a slogan. This is about creating memorable moments for our consumers and about being proud of the products we make. Let me share a recent moment where our purpose resonated particularly well with me and where I, again, was reminded that what we do really matters. Earlier this year, I traveled to Cannes, where there is the annual duty-free event of the year, attracting customers from all over the world. On the day before the event, I went down to check out our booth, and I was very proud to find a beautiful booth with a nice smoking terrace.
I also met two of my colleagues, Sean and Marianne, who were busy getting the booth ready for the customers we would receive the following day, and I did my best to help out. It was good fun, and when we finished, we all gathered on the terrace to share a nice cigar. That was a great moment where we had the opportunity to catch up on what was happening in our different lives, but also with our different history around Cannes. That was indeed a memorable moment, a special moment that brought us closer together. That is fundamentally why we exist, to create those moments of enjoyment, those moments of reflection, and also those small moments that make our everyday life a little better. Our vision is unchanged. It is to be the undisputed and sustainable global leader in cigars. Let's now turn to the new strategy.
is now almost 10 years ago we listed Scandinavian Tobacco Group on the Copenhagen Stock Exchange. In those 10 years, we returned more than DKK 9 billion to our shareholders through dividends and share buybacks. We have built an even larger and more profitable company. Going forward, STG remains committed to deliver attractive shareholder returns through exactly the same mechanism, dividends and share buybacks, as we have done for the past 10 years. That is a strong starting point for our new strategy, which we call Focus 2030. We do so because we need to do fewer things better. Our environment has changed significantly over the past 10 years. We are today facing a global economy that is characterized by more geopolitical unrest and also a new global trade order.
We also see that consumers have a much wider assortment to choose from within the tobacco and nicotine industry, and the industry itself is undergoing significant transformation. Lastly, we see that the regulation of the industry is not only increasing, it is not being harmonized globally, and this is particularly the case for next-generation products. Combined, these developments reflect a more uncertain and less predictable marketplace, and our response, as I will outline in a second, is to sharpen our focus. We aim to build an even more consumer-centric company capable of supporting fewer but larger power brands. We will be more aggressive in simplifying our portfolios and simplifying our business to make sure that our employees can concentrate on what is really important. We will focus our investments in the areas where we see the biggest match between the size of the opportunity and our right to win.
Finally, we will invest in people, data, digitalization, and business analytics to help our organization execute faster and better and drive cost efficiency. Now, let me turn to examine how success will look in 2030. The purpose of our strategy is not only to create value by executing the strategy well, but also to develop a company that is even better positioned to create value beyond 2030. We are confident that we can do so, and success in 2030 looks as follows: a sustainable and stable machine-rolled cigar and smoking tobacco business with its primary focus on Europe, a growing and increasingly attractive handmade cigar business anchored in the U.S., but with an even stronger global footprint, and a larger nicotine pouch business with further upside in an attractive category.
In the process, we will turn the negative earnings trend around that we've seen for the past three years, and we will create value for consumers, for employees, and for shareholders. Before we start getting into the details of the strategy, let me first review what has worked well over the past five years and also where we have struggled along the road. We have grown Scandinavian Tobacco Group through several acquisitions that have strengthened our portfolio, and we did so on the back of the large RGO transaction. We took an important decision to start rolling out our global SAP solution, which we call One Process, which is a significant change to our systems and to our ways of working, helping us become more standardized, more globalized, and more cost-efficient.
When fully implemented, this is a critical enabler for our business that will enable us to scale our business into the future and deliver more cost efficiency. Our sustainability efforts have also progressed well, especially within compliance and climate. We are also now focusing on a purposeful packaging program, which will help us reduce our packaging footprint and position ourselves as a sustainable company for the future. Our growth enablers have not only grown, they are also showing more potential. In the last period, we returned more than DKK 5 billion to shareholders through dividends and share buybacks. These are all achievements that we are proud of, but as I said before, we have also seen struggles along the way.
Now, the strategic period has been somewhat of a roller coaster with respect to earnings, with 2022 being our highlight and declines seen from 2023 to 2025. Some elements of this have been driven by industry developments and some by our own mistakes, but first and foremost, we have not succeeded in stabilizing our machine-rolled cigar business. We've also struggled with costs of building capabilities, running ahead of benefits, and although we have delivered positive total shareholder returns over the five-year period, we've not been able to match our industry peers. That must improve going forward, and that is what we intend the strategy to deliver. Let me now take a closer look at where we are today. Scandinavian Tobacco Group is first and foremost a market-leading company in machine-rolled cigars in Europe and handmade cigars in the U.S..
We are, of course, the global leader in pipe tobacco. If we are not the market-leading company, which is the case for our fine cut and our nicotine pouch business, then we have strong and attractive market positions in selected markets such as Denmark, Norway, Germany, U.S., and Israel for fine cut, and Sweden for nicotine pouches. This is a strong starting point for implementing our new strategy. We are also operating in an industry that is undergoing significant transformation driven by the expansion of next-generation products. It is more important than ever that the strategy clearly contains choices of what to do and what not to do. If we look at our financial reality, we have to start to turn our earnings development around, and we must show that we have a sustainable and growing business going forward.
At the same time, we need to reduce our gearing to the level or below of our target, and we need to make the necessary investments behind our business and our brands. We are committed to these objectives, and it's also why we have reviewed and changed our capital allocation policy and introduced a more flexible dividend policy that Marianne will return and talk later this afternoon. However, it is important for me to emphasize that the new allocation policy does not change our commitment to deliver strong shareholder returns going forward in the form of dividends and in the form of share buybacks. The new capital allocation policy facilitates a better implementation of the new strategy with more flexibility for us to decide how to use the capital we generate. Now, let's look at the new strategy in more detail. We have identified three strategic priorities in Focus 2030.
They are to stabilize the performance of our machine-rolled cigar business. They are to fully exploit the growth opportunities we see in handmade cigars, and it is to accelerate our growth in nicotine pouches. The new strategy is anchored in strong brands and strong market positions across our diversified portfolio. However, the market conditions and the strategy call for us to allocate resources differently going forward to ensure that we focus on and capture the largest growth opportunities that we see. Now, the strategy addresses what we need to fix because it's not working according to or not living up to our expectations, but it also focuses on what we do well and how we will push that even harder to create even stronger results, all with a combined ambition to create a sustainable and growing company with potential beyond 2030.
Let's now look at how we'll fix the performance in machine-rolled cigar and support our foundation of machine-rolled cigars and smoking tobacco, which together represent around 50% of our net sales. Our single biggest operational problem has been machine-rolled cigars, and here we've seen multiple challenges. Some have been caused by industry developments, some have been caused by our own mistakes. Market conditions have definitely become more difficult, and we have seen more price competition. To stay competitive, we have made pricing decisions that have affected margins negatively, but they have also reduced the overall size of the profit pool. Finding ways to restore this profit pool is at the very top of our mind. We also have an underlying structural problem in machine-rolled cigars, with Scandinavian Tobacco Group being the strongest in the markets and segments that decline the most.
We are working hard to mitigate this underlying trend, and as I'll talk about it, we are seeing small signs of improvement. We also integrated the RGO factories in 2021, and we made some mistakes in this process that led to a longer period where we had problems supplying enough product to the market. Unfortunately, we saw this again in 2025 as we rolled out the global SAP solution in our European markets. This has negatively impacted our market shares in Europe. The result of these three things is that the bulk of our earnings decline over the past three years can be explained by the machine-rolled cigar development, and the strategy needs to change this. Why are we confident that the strategy will be successful in doing this? First, it's important to remember that we are still the European market leader in machine-rolled cigars.
That's a strong starting point. We are focusing on protecting our strongholds while we are building market shares in the segments and the markets where we are less strong than today. As I said, we're seeing small signs of improvement, but this is a critical success area. We have actually finished the rollout of SAP in Europe, which means that we are now concentrating on stabilizing the system and normalizing supply. This should help our performance already in 2026. We are also implementing a significant portfolio simplification, and we are focusing our efforts around four power brands. This will enable our supply chain to contain cost increases and protect margins, and we continue to work diligently with better pricing, but this also contributes to protecting margins.
Together with our strengthened smoking tobacco portfolio on the back of the Mac Baren acquisition, we are confident that we can keep earnings stable from this important part of our business over the strategic period, and this is critical for us in order to see the full value of the growth opportunities we see in both handmade cigars and nicotine pouches. I also think it's important to emphasize that the combined machine-rolled cigar and smoking tobacco business is the foundation for a range of sales companies and distributors that we have across Europe and the rest of the world, and we can use these to leverage growth opportunities for other parts of our business. However, this is the part of our business where we will allocate less resources in the strategic period.
Let me now turn to the handmade cigar business, which represents around 37% of our net sales and which has grown consistently throughout the previous strategic period. Now, this is a category where we have a very strong market position, not only through our own brand portfolio, but also through our own online sales platforms and through our own retail stores. This is also a category that during COVID saw a lot of turbulence, with consumption going up as consumers went home and smoked more cigars. Post-COVID, this market has come down faster than we anticipated, and this has been further disrupted by tariffs, cost inflation, and consumer sentiment in 2025. We still expect this category to return to a -2% annual decline over the strategy period, however, only starting in 2027.
Promotion pressure has increased for the handmade cigar category across all channels in 2025, and due to tariffs and cost inflation, we are also seeing more downtrading. However, during 2025, we've also adjusted our brand portfolio and our promotion tactics, and my assessment is that we will enter 2026 in a very competitive position, and we are well positioned to execute the new strategy in handmade cigars. The strategy aims to accelerate our growth in handmade cigars by focusing our efforts around four power brands: Macanudo, Cohiba, Alec Bradley, and CAO, to make them bigger and to make them even more relevant for consumers. We will give our own handmade cigars more preference across the sales channels that we control. Subject to continued strong performance in our own retail stores, we expect to continue to add more stores to our already strong network.
The stores deliver attractive economic metrics, and Régis will come back to this a little later this afternoon, but we will aim to open more new stores in the next strategic period than the eight stores we opened in the strategic period we are just closing. We will invest in production and in distribution to secure quality and availability for our handmade cigar portfolio, and we are tailoring the manufacturing approach to make sure we can compete in both value and premium segments, being cost-efficient for value cigars and adding craftsmanship and luxury for our premium brands. The international growth will follow the same approach, applying the U.S. brand strategy and simplification to other markets outside the US. All in all, we are very confident that we can accelerate the growth in the handmade cigar category, primarily in the U.S., but also globally.
This is a category where we have a very strong starting point, where we want to invest more and where we feel we can compete well and gain market shares. Let me now turn to nicotine pouches, which represent around 5% of our business today, but is also a category with significant growth potential and an attractive category. Now, this business started a few years ago as a growth incubator project, but in the new strategy, we have made the nicotine pouch business into a core business for Scandinavian Tobacco Group, and we made it one of our three strategic priorities. Many people have asked me, why is this a good business for Scandinavian Tobacco Group to be in? The answer is actually quite simple.
First, we see consumers increasingly becoming multi-category users, and it's simply too big a risk for us not to be active in any next-generation products at all, especially for our machine-rolled cigars. We are concerned because over time, we expect there to be fewer cigarette smokers, and cigarette smokers are the main source of customers in the machine-rolled cigar business. Secondly, we have shown that we can compete in nicotine pouches, especially in Sweden, where we now have more than 13% market share, and we are the second largest brand in the nicotine pouch category, and we are also growing outside of Sweden. Finally, this is a fast-growing and financially attractive category with the potential to become a very large business for Scandinavian Tobacco Group, and with margins that, when fully insourced, should be at the level of our core cigar business or higher.
The strategy sets out how we intend to grow this business with our primary focus on Europe. Our power brand in this category is XQS, and we have two focus markets, Sweden and the U.K., and we have one success criteria, which is to grow market share. We have, as a company, our strength in the flavored segment of the market, but we are investing in capabilities to build our mint expertise, which is still the dominant segment of the nicotine pouch business, and this will improve our ability to compete, and it will also safeguard us against potential flavor regulation in this category over the years. We remain asset-light in our approach to this category, and although we expect gross margins to improve over the strategic period, we are not assuming any value from insourcing, but we will continue to work with our contract manufacturing partners.
We are currently generating approximately 30% in gross margin and not losing any money in this business. Insourcing is assessed to contribute around 15-20 margin points in uplift equal to around DKK 60 million-DKK 80 million on the current size of our business. This is a business where we will keep our options open, and on a regular basis, we will assess whether we are still following the right direction or whether we need to recalibrate our strategy. To Scandinavian Tobacco Group, this is a segment with significant potential globally, but it's also a category where we still have a lot to learn. Now, those were the three strategic priorities in Focus 2030, and let me now use our strategy leaf to summarize what we are setting out to do in the next period.
Focus 2030 is about sharpening our focus and doing fewer things better, but it's also about turning our earnings trend around and building a more sustainable company for the future. We are confident that we can do so, and we believe that in 2030, we will be a more attractive company to consumers, employees, and shareholders. We will have a business that consists of a stable and sustainable machine-rolled and smoking tobacco business as our foundation. We will have a growing and increasingly attractive handmade cigar business anchored in the U.S., but with a stronger global footprint, and we'll have a larger nicotine pouch business with an upside in an attractive category. That concludes my introduction for today, and I'll now hand back to Torben, who will introduce the next speaker. Thank you very much for your attention.
Thank you, Niels.
Before we jump to the next part of the program, I'll just again remind you of the Q&A session we're going to have after Régis's presentation. Just again to remind you, I know there's quite many Danes that are also following us on the webcast. You are absolutely okay to type in your questions in Danish. I will translate them into English, so that's perfectly okay, just as a notice. With that, I will leave the word to Régis for the introduction of our strategic priorities.
Good.
Thank you, Torben, and a very good day to everyone on the live broadcast. My name is Régis Broersma, and I'm the Chief Commercial Officer of Scandinavian Tobacco Group. You've just heard the overall direction of our new strategy, Focus 2030, and also some of the highlights of the three strategic priorities.
In the next section, I will bring these to life. How we win by focusing on our consumers, on key brands, on key countries, and also to focus on commercial execution excellence. Let me start with the first strategic priority, which is stabilizing our machine-rolled cigar business. This is a category where we have faced challenges over the recent years. In the next slide, I will show you how we intend to turn around the performance. As Niels mentioned, shift starts with focus. Instead of trying to win everywhere, we anchor behind four power brands: Panther, Signature, Mihalys, and La Paz. These are our largest and most distributed brands. They're covering all the spectrum of pricing and also all the consumer needs states. We will also concentrate on two key markets, which are Spain and France.
They are large, strategically important, less restricted from a regulatory perspective, and we have a strong route-to-market capability. We have become more complex over the years, which is mostly driven also by our recent acquisitions. By simplifying our portfolio and reducing SKU complexity, we free up operational efficiency and redirect investments to fewer, but bigger brands. Why will it work this time? You have heard this before. Because we have a clarified simplification roadmap across blends, formants, brands, and SKUs, all backed by strong internal data and milestones defined. The good news is the implementation is already on its way. A few examples. A perfect example is smoking tobacco and the U.S., like our acquisition of Mac Baren Tobacco Company. There were close to 2,000 SKUs in that portfolio.
At the beginning of this year, we basically rationalized all of them except for a handful, which we moved to our factory in Essens and Holstebro. We have migrated those SKUs to STG brands, which have a higher margin. A second example is our machine-rolled cigar business, where we have identified 50% of the SKUs where we can rationalize, and that is also already in the implementation phase. We are well on our way. Our ambition is to reverse market share erosion and gain 2 percentage points from 27% to 29% in the core seven European markets. This is a balancing act between pushing for share recovery, which is volume on one hand, and on profitability on the other hand. This is to maximize value creation. Let's zoom out and look at the European landscape. The seven key markets in Europe represent around 4 billion machine-rolled cigars.
Core contributors are Germany, France, and Spain. Recent market decline shows a CAGR of -4%, and we expect in the future that it will revert to around -3% CAGR. In recent years, we have also seen that the STG strongholds are declining faster than the total market average. Those are France, U.K., and Belgium. The good news is in 2025, it looks more favorable because the total market decline in the first nine months of this year is around -0.7%. Now, why has STG struggled? There are many reasons, but I will highlight three of them. First of all, Niels already mentioned, we have not been able to adequately supply the markets over the last couple of years. These are because of the decisions we made during the Agile integration, but also with the go lives with the different waves in our SAP rollouts.
This has put pressure on our market positions, hence the decline in volume, net sales, and gross profit. The second reason is a negative country mix. Our strongholds are decreasing the fastest, which is again Belgium, U.K., and France. The third sub-segment, the third reason, sorry, the sub-segment dynamics. The traditional segment is where we are declining. We have strong margins there, but that total segment is in decline. We are under-indexed in the filter and flavor. The margins are a little bit lower than the traditional segment, and this segment is more resilient. We've made progress in filter and flavor, but we need a balanced approach going forward. We need to stay strong in the traditional segment, especially with potential flavor bans coming at the end of the strategic period.
We also need to strengthen in filter and flavor, and we do that by our power brands and consumer-relevant propositions. Year to date, we already see that we are improving. We measure six sub-segments, and we have stabilized five or even growing in five of them. The traditional segment, we're still declining, and that is the one we need to fix. Despite recent challenges, we're still the number one player in Europe. We have strong market positions across, so we start from a position of strength. Our focus will be on tailoring our strategies to the characteristics of each of the markets. France, Spain, and Italy are push markets, so active selling is needed. Belgium, Netherlands, and the U.K. are highly regulated, and that is where it is about profit extraction.
Germany is large, the combination of push and pull, and is very strong in the private label and in the value little cigar segments. Let's move to the brands. Our power brand selection is grounded in deep consumer insights, both in functional needs, but also in emotional needs. Together, the four selected power brands form the right mix for growth, covering all the consumer needs states that we have in our category. To remind you, the four power brands are Panther, Signature, Mihalys, and La Paz. A few examples. Signature. Signature holds a distinct stronghold in the consumer territory called enjoyment. Signature performs strongly in everyday, contemporary, and simple smoking occasions, especially in our stronghold countries, France, and the U.K. Each of Signature's sub-ranges drives consumer relevance by delivering on what the consumer needs in functional and emotional benefits.
For Signature, that is an original smooth indulgence and elevating everyday moments. A second example, La Paz. La Paz holds a distinctive stronghold in the consumer territory called authenticity. La Paz performs strongly in more sophisticated and upscale smoking occasions. Addition and authenticity are key for a La Paz smoker. The brand equity of La Paz is one of the strongest that we have in our total STG brand portfolio and plays a significant role in increasing value share of our portfolio. The four power brands already represent around 60% of our volume and around 50% of our net sales. They cover, as said, a wide spectrum of pricing, also consumer needs, and also they have a high distribution reach. To elaborate on the pricing, Panther is our most value proposition, followed by Signature, followed by Mihalys, and La Paz is our premium proposition.
Selected brands remain important as regional heroes. For example, Gold and Mercator, the number one and number two brand in Belgium, deliver super high margins. It is key that we keep on extracting value. Over time, the wider portfolio will be migrated into the four power brands. Why do we believe the power brand strategy will work? It is because we already see results. Since establishing the one commercial organization last year, we have redirected focus towards some of our key brands. Signature is a perfect example. During 2025, we have initiated initiatives in both France and Spain, and we see positive results. The initiatives are around consumer activation, trade activation, pricing, and distribution. The results: Signature in the first nine months of this year has grown one and a half percentage points in Spain and 0.5 percentage points in France.
Good results, and this gives us real confidence that this power brand strategy will work. Each market plays a distinct role in our Focus 2030 strategy. France is about protecting and growing from a strong share base. It's about trade activation and about simplification. Spain, a key growth engine when it comes to value. It's about the four power brands and consumer activation. Belgium and U.K., as mentioned before, it is about maximizing profitability through pricing and simplification. Germany, Italy, and Netherlands is a balanced approach. We need to stabilize and find the balance between a volume push and a margin extraction. The road to success comes via focus on key markets, focus on key brands, leading to a 2 percentage points increase in market share in the core seven countries.
The 2 percentage points gain is a deliberate choice, first in stabilizing share erosion, and then increasing through a balanced approach between volume push and margin extraction to create the maximum value. On top, efficiency comes from simplification, both commercially and operationally. We are currently too complex. We have too many brands, too many SKUs, and almost 50% of our SKUs deliver 5% of our volume, and even less in net sales and even less in gross profit. We need fewer brands, fewer SKUs, more scale, leading to a streamlined supply chain. The combination of market share gains and portfolio simplification will lead to margin protection and a clear commercial execution. Let's continue to our next strategic priority: grow our handmade cigar business. Stabilizing machine-rolled cigars unlocks our ability to fully scale handmade cigars and our nicotine pouch business. The two biggest growth opportunities in STG.
As with machine-rolled cigars, we will focus on four power brands: Macanudo, CAO, Cohiba, and Alec Bradley. They cover the full spectrum of pricing and cover most of the consumer needs states. We have leading positions in wholesale with a strong brand portfolio. We have a leading position in online, and we have a leading position with our soon-to-be 15 superstores. The opportunity lies in integrating these channels, especially our STG-owned channels, into one ecosystem, unleashing the full potential of our STG brands. Retail continues to be strong, is a success story, and with more to come. Our ambition is to grow 2 percentage points in U.S. handmade cigar market share from 13% to 15%. Zooming then out on the global handmade cigar category. The U.S. is the engine of the U.S., sorry, the U.S. is the engine of the global handmade cigar category.
Around 70% of global consumption is consumed in the U.S.. In order to win with handmade cigars globally, we must win in the U.S.. We estimate the market to be around 435 million cigars in the U.S., and we see that pre-COVID, the market was declining with around 1-2%. During COVID, it was a mini boom with double-digit increase, and then the market has come down a little bit faster than we anticipated with a mid-single-digit number. After this COVID volatility, we do expect declines to return to pre-COVID levels. We start from a leading position. We have 13% market share with our STG-owned brands. Our four power brands represent 45% of our handmade cigar net sales, yet only 5% of the total U.S. handmade cigar market. There is a huge runway for growth.
The U.S. handmade cigar market is extremely fragmented, and there are only a few brands that cross the 1 percentage point share. We aim to grow 2 percentage points from 13% to 15% by focusing on our four power brands and fully leveraging the ecosystem of our STG-owned channels. Of course, we will continue selling third-party, but the focus will shift to our own brands in order to capture the full margin chain. Our power brands span all major price tiers, and as said, most of the consumer needs states. We will invest in fewer and bigger brands, and success requires consistent positioning between wholesale, online, and retail. We will do this by aligning KPIs for the different teams and also with new ways of working for the teams.
We will be competitive in both value and premium, delivering a luxury, premium, and elevated experience on one hand and cost competitiveness for the value seekers on the other hand. Online will become more distinctive with its own exclusives and even more proprietary brands, and the proof point in the end is a market share gain, as said, with 2 percentage points. Our brand strategy is rooted in deep consumer insights in the US, and we did a full refresh in 2025. We understand the emotional and functional needs and drivers behind the handmade cigar consumer even better than we did before. We have segmented the U.S. handmade cigar market in seven distinct segments with each its distinct characteristics. We've mapped the STG brands in this landscape, leading to a clear consumer targeting for each of STG's brands. This data will be enriched with vast insights from our online platforms.
To give a few examples, Macanudo attracts consumers and smokers seeking security and approachability, so looking for a safer choice. Cohiba is exactly the opposite. It's about standing out and it's about finding enjoyment in the finer and more premium experiences in life. Because the category is highly fragmented, a broader portfolio remains essential. The four power brands cover most consumer needs states, but we need a set of other brands to complement this. Macanudo. Macanudo is our lead and largest brand. Approachable, trusted, and unintimidating. Sub-ranges meet different consumer needs and also different occasions. To give a few examples, Macanudo Café is for the everyday smoke. Macanudo Gold Label is for more special moments, elevating the Macanudo Café experience and treating yourself. Macanudo Inspirado is for the younger adult smokers looking for taste variety with a more accessible price point.
With strong consumer and online insights, we can target each consumer with much more precision. This is all based on strong understanding of demographics, motivations, occasions, interests, and the emotional functional benefits that the consumers hold. A perfect example on where Macanudo smoker is at ease is at one of our Club Macanudos around the world, either in New York or in Jakarta, Kuala Lumpur, and I am sure more to come. STG's unique ecosystem gives us an unmatched strength. We hold a leading position in wholesale with our strong brand portfolio. We have a strong leading position in online with around 40% share, and we have a strong position in retail with our own Cigar International Superstores, which are close to 15 in the next couple of weeks. How will the new strategy come to life? In our own retail, power brands will take center stage.
They will be supplemented by our ambassadors, by events, by exclusives, limited editions, and staff recommendations. In our own online, power brands will be enhanced with exclusive sub-ranges, different price points that are needed to play in the online channel, and of course, focused promotion behind it. In own wholesale or in wholesale, focus mirrors our own retail stores. It is about power brands, distribution, visibility, education, and focused promotion also. This omnichannel approach will drive scale and will drive margin. Retail expansion is a success story, and we continue to expand our U.S. retail footprint. The majority of our retail stores are in Pennsylvania, Texas, and Florida. Soon, stores number 14 and number 15 will open in Orlando, Florida, and in Newport, Kentucky. During the past strategic period, we have opened eight superstores.
Key locations align with population density, favorable tax landscape, more liberal smoking regulations, and a high out-of-home beverage consumption. As Niels mentioned before, 2026 is about stabilization, so therefore we take a pause in our retail expansion in 2026 as it is CapEx intensive. That is a clear choice. Marianne will later explain the strong financial returns behind retail. This concludes the second strategic priority. After the break, I will come back with our third one, which is accelerating our growth in nicotine pouches. For now, I hand back to Torben, who will open the floor for questions.
Thank you, Régis. I can at least conclude that there is a sense of speed for the presenters because we are a little ahead of schedule already. That is actually great because we have a little more time for questions.
As I addressed in my opening remarks, the first questions will take only from the webcast, and I can see already a lot is coming in. I will try to focus the questions for now on what has been presented, and I can assure you that we will get back to the more financial-related questions in the second round. Let me start with a question for you, Régis. This is basically concerning how we will assure that we attract new consumers to our various categories and if there are special assessments in relation to younger consumers.
Okay, let's look at this from a category perspective. When we look at handmade cigars and machine-rolled cigars, the recruitment is in a majority coming from combustible categories, so from cigarettes and from smoking tobacco.
If you look at the youth aspect there, the average age group of these categories is relatively high. The youth aspect is not relevant in these categories. If you look at nicotine pouches, the category is more the consumer becomes more of a poly category user. Recruitment comes from cigarettes, comes from even cigars, cigarillos, pipe tobacco. That is where the recruitment is coming from. Of course, also from traditional snus, and we are gaining market share, so we are also gaining from competitive brands. When it comes to the youth aspect, everything we do will go via our legal department. We have marketing principles in place, and there are many cases more strict than the local regulations.
Thank you, Régis.
I think, actually, we should not walk away too long because we do have a number of questions also relating to the rationalization of our portfolios. Let me start off with one we have here. How many, or how will you actually manage the reduction in the SKUs? Do you expect this to have an impact on volumes and market share even in the shorter-term perspective?
We have programs in place. We have started with the first, which is smoking tobacco portfolio, especially after the acquisition of Mac Baren Tobacco Company. There we are already well on our way. We have different phases with different KPIs. We have the financials behind it that indeed we will lose the volume, of course, for the rationalized SKUs, but a big part will actually migrate to our other brands, which have a higher margin.
The higher margin will compensate for some of the volume losses. The machine-rolled cigars, we have done similar exercises. There we are in the beginning phases of the rationalization. We have KPIs in place that if we see something going off, then we pivot and we actually evaluate again and redefine the plan.
I think there is a build-on on this from another from the audience. That is basically also again on the machine-rolled cigar portfolio with our kind of focus to four power brands. Is it that we are going to migrate into the power brands? How can we expect to minimize any losses of revenue when we do that exercise?
We do have a lot of brands in basically every category. When it comes to machine-rolled cigars, we have about 50 brands.
There is a long way to go from 50 to 4. The overall intention is to indeed the wider portfolio to migrate into the four power brands. We have also a lot of regional heroes that we want to leverage. They are important. They just have a different role, which is about maximizing the profit from it. Again, we also have here the business cases, the financials, the milestones. We will pivot when we see things going off track or even when it goes better, we can accelerate. I think that answers.
Okay, thank you. I will get you off the hook for a moment, Régis, and ask Niels to come in because I think the comments you made about nicotine pouches and what potentially could trigger that we insource the production.
The basic questions that are being addressed here, what will it really take for you or us to insource a different or a certain level of sales? How do you think about that?
Yes, thank you. I think maybe start by saying that we already have a small nicotine pouch factory that we acquired together with Mac Baren. We are already producing part of our portfolio today. We could insource everything today. We have a large enough volume now to run our own factory, but it is really not our priority. There are also a lot of benefits of working with competent contract manufacturers, and we have a number of them. Our focus is simply somewhere else at the moment. It is much more important for us to drive growth in Sweden, in the U.K., and outside of these markets.
We will get to insourcing down the road, but it's not really volume-driven. I think it's about when we think the timing is right and when we think that there's value in actually controlling a larger part of the value chain ourselves.
Okay, thank you. Régis, we will have another one for you. A lot of good interest around these strategic priorities. This is more about the consumer insights. Can you talk a little bit about the investments we make in consumer insights? How do you think this differentiates you or us from competitors?
Yeah, and we have a lot of consumer insights. We don't start from scratch. We have a lot of total market insights, especially in our seven key markets, also in our online and also in our mass market in Europe. We have a lot of information from our online platforms.
We do understand the consumer better than anyone else. This is a competitive advantage. This is also one of the reasons that we mentioned is that we can use this and leverage this more across the different entities in handmade cigars, either in retail, online, or in the wholesale business. It is a competitive advantage. Did I answer the question?
I think it did. Also, we're building again on kind of the SKU rationalization part. You mentioned a little bit about how many SKUs we intend to potentially reduce. Are we prepared to differentiate between machine-rolled cigars and handmade cigars? Is it across? How do you think about that?
Yeah, so both for smoking tobacco and machine-rolled cigars, we have identified 50% of the SKUs, different phases into it. We have started with smoking tobacco first, then with the machine-rolled cigars.
That's where the most value can be created by simplification. Handmade cigars, also in the plants. We have not crafted the full plan yet, but that will come next year. It is a phased approach. The number of SKUs will most likely not be the same as what we do for machine-rolled cigars and smoking tobacco, but definitely in the plants.
Okay, thank you. One for you, Niels. Before, I think we will take the break. This will be the final question for now. Niels, this is about kind of in the past, we've had production issues. We've had issues with availability. Now Régis talks a lot about how to grow our business. How are we actually going to solve that? Can we be assured that the problems are kind of solved?
Yeah, I think it's not only investors, but also us that are disappointed about how long we've been struggling with supply issues in machine-rolled cigars. I think it's important to understand there are two main reasons that have driven the supply issues, and they are actually almost behind us, both of them. The first one was the merger of the R2 factories into the STG factories. There we made some mistakes. We had a prolonged period of supply issues. When we solved that, we were okay for a period. In 2025, we saw new supply issues as we roll out the global SAP solution in Europe. We are also almost solved those problems.
What we are doing in these months as we speak is we're having full focus on stabilizing the system and getting inventory back to normal so that when we enter 2026, we do so from a stronger perspective. These two things that are behind us, we're still working a lot on improving our planning, getting demand accurate, getting supply conversion to work better. This is what we are focusing on now. The bigger issues that have caused the supply issues, we actually think we have put them behind us.
Okay, thank you. I think we will conclude now for at least this short Q&A. Again, there will be a larger one by the end of the presentation today.
I suggest we take a break to 10 minutes past the hour, so 10 minutes past 3, and then we will be back and we'll start off by showing you a little video. Thank you.
Planting. Take time to enjoy a moment. Consider its origins. Some moments begin at the source. From seed to cigar, these moments are created by hand, with patience and knowledge. Every seed has great potential. Our role is to realize it. Every moment of growth, every hour of sun, shade, and supervision is stored in the leaf as a memory. Every plant has a journey. Every crop a vintage. Only the finest foliage will be destined to deliver a moment of enjoyment. Harvesting. Each leaf bears an imprint of where it was grown. The sun, the shade, the care, stored like a memory.
Months of blazing sun yields pungent flavors, intensifying filler tobacco, while wrappers have subtler nuances because they are born in the shade. Leaves ripen individually and are harvested at their peak, one at a time, by hand, with care. Every variety, every leaf is raised for a purpose. Sorting and grading. Fermentation realizes hidden potential, but not all leaves make the cut. Continuous sorting and grading pairs potential with purpose. Some leaves are grown for wrappers, others for filler tobacco. Quality is what weeds out the weak. In the field, the central veins supplied the leaf with nutrients. Now, after years of cultivation, preservation, and evaluation, it is time to cut the cord. The vein is bitter and risks extinguishing that moment of enjoyment of a handmade cigar. Stripping the vein improves both taste and burn. Each leaf then is destined for maturation.
It can take up to three years for nature's finest tobaccos to reveal their full potential. Rolling. Years of careful upbringing and meticulous attention are placed in the skilled hands of rollers and transformed into cigars. Enjoyment caters to more than the eye. Draw and flavor must be perfect. Filler tobacco is central to the cigar, held in place by a binder before fitted with the finest leaf, the wrapper. Its fate is sealed with a cap. The cigar is a complex creation crafted with tradition and care.
There are many old-world cigar secrets nearly lost to time, for they are too challenging and time-consuming to attempt them. The artisanal tertial aging process was one of these techniques, but now that has changed. A stored Cuban aging technique. This method is rarely used today, but we do not let any challenge stand between us and an excellent cigar.
The tobacco ages in bales made from yucca, a dense bark from the majestic royal palm tree, bound with delicacy and precision. The yucca provides the ideal aging environment to enhance the tobacco's taste and aroma. The rich smoking experience is a testament to that technique. The exquisite flavor is a culmination of the journey. We put our trust in this time-honored process. After all, process makes perfect.
Welcome back. Now we are ready for the second half of the Capital Markets event. I hope you enjoyed the video here that basically showed a little bit about the uniqueness of our handmade cigars. Now it's time to move on. Régis has told a little bit about how we would stabilize machine-rolled cigars.
We have also dwelled into how we are going to grow our handmade business, and now it's time to put some more details to how we want to accelerate our nicotine pouch business. With that, I leave it for you, Régis.
Welcome back, and let's continue with strategic priority number three, which is accelerating our growth in nicotine pouches. This one, like the other two, is actually close to my heart because it's only a few years ago that we hired the first person in the growth incubator. Here we are a few years later, and we're aiming to reach over DKK 400 million in net sales in 2025. Niels already talked about the strategic rationale around nicotine pouches.
Marianne will cover later the financials behind this growth opportunity, and I will, as with the other two strategic priorities, dive deeper into the commercial aspects. It starts with understanding the consumer and developing capabilities to deliver to the consumers what they desire and what they need. Our primary focus is on Europe, with key markets Sweden and the U.K. We have shown that we can compete by using our existing route-to-market capabilities and also our strong trading partner relationships, for example, in Sweden. This is a business where we keep our options open. We regularly evaluate and decide on where and how to invest. This is a segment that has significant potential globally and for the future. Let's look at the total market development, like the other two strategic priorities.
Here we are showing the retail value of the three categories that STG is active in: nicotine pouches, cigars and cigarillos, and smoking tobacco. All three categories are increasing its retail value, but nicotine pouches really stand out. Over the last five years, a CAGR growth of 77% and an expected CAGR growth in the next five years of 18%, overtaking already smoking tobacco and closing in fast on cigars and cigarillos. The consumer landscape is changing fast, and the consumers are becoming more and more multi-category users. Traditional combustible regulations are limiting the moments and occasions where a consumer can enjoy her or his nicotine experience. Nicotine pouches serve as a less harmful alternative, and it expands the number of permissible moments of enjoyment. Nicotine pouches allow us to reach new consumers and extend usage occasions. Sweden is our proof case.
XQS is now the number two brand in the market and the fastest growing brand in the market, but more about that later. We have learned a lot over the last years. We launched Ström in 2022, we acquired XQS in 2023, and we acquired Ministry of Snooze with Ace and Grit in 2024. Four brands, but the future brand portfolio is centered around one power brand, and that is XQS. We have strong in-house mint capabilities, and we have strong capabilities in flavor with our external partners. On top, we have built digital marketing and e-commerce capabilities, and we will continue to do so in the next five years. We use these capabilities to deliver a strong competitive product and to build a stronger brand with efficient and disciplined investments.
We continue to focus our effort on Sweden and the U.K., while we also evaluate new markets based on total market size, regulatory landscape, and our route-to-market strength. XQS and Sweden is a remarkable success story, and one can even call it a love story. Two years ago, less than 2% market share. Today, we have over 13% market share, and we are the number two brand in Sweden. XQS is seen as a highly innovative brand with a strong flavor and novelty appeal. Momentum is strong, and we plan to continue it. Over the last years, we also have gathered a lot of detailed consumer insights. Each XQS sub-range is designed to meet the different motivations of each of these segments. For example, the experience seekers. This is the stronghold of XQS. This segment is driven by novelty, freedom, and community.
XQS's fruity and nostalgia ranges fit perfectly into this. XQS delivers on demand for exciting taste, limited taste editions, and regular innovations. XQS will continuously expand and develop its portfolio to deliver on the consumer needs that exist. XQS covers that with four portfolio brand pillars: nostalgia, core, mint, and functional. Geographically, our expansion strategy is focused and disciplined. We cannot be everywhere, so we need to focus where it matters most. The U.K. is a perfect example of this, which is one of our key strategic markets. The U.K. is a key market for the future when it comes to total market size and also profitability. We have a strong leading position in machine-rolled cigars and in pipe tobacco, and we use that base to leverage the launch of XQS while expanding our universe coverage by extending our sales force.
We adapt the core XQS portfolio to the U.K. consumer needs. This is to increase relevance. We keep on evolving, and we never stand still. We recently crossed the 1% market share in the U.K., and we are intending to accelerate with currently implementing new key account listings. Outside of Sweden and the U.K., we have progressed in selected markets with strong distributor partners. For example, Iceland, Norway, Finland, Poland, and Czech Republic. In summary, we stabilize our machine-rolled cigar business by focusing on four power brands, focusing on selected European markets, Spain and France, and by focusing on simplification. We grow our handmade cigar business with key focus on the U.S., with key focus on our four power brands, retail expansion, and making the ecosystem work to unleash the full value of our STG brands.
We accelerate our nicotine pouch business by focusing on selected markets and focusing on one power brand, which is called XQS. On that note, thank you very much. Those were the three strategic priorities, and thank you for your attention, and I'll hand over back to you, Torben.
Thank you, Regis. That concludes kind of the first two sections of today. Niels talked about the overall strategic purpose of our Focus 2030, and Régis has now unfolded on how we actually are going to make the strategic priorities alive. Next up, that's our CFO, Marianne, that's going to talk more to the financials and our financial ambitions. Marianne, please.
Thank you, Torben. I am Marianne Bock, and I am CFO at Scandinavian Tobacco Group, and I have really been looking forward to presenting to you today.
Niels and Régis have outlined our strategy and the initiatives that are essential for our success. I will translate these into financial ambitions and performance metrics. Drawing on our insights from our recent previous strategy, Rolling Thoughts 2025, and changes in consumer behavior, we recognize that we need to make deliberate choices and set clear priorities when investing. Return on invested capital is a critical KPI for us. ROIC ensures that we maintain discipline in our investments, whether in organic initiatives or mergers and acquisitions. Making the right decisions is essential to deliver long-term sustainable profits and strong cash flows. Our strategy, Focus 2030, provides a solid foundation for progress, although the journey will also present challenges. To enable the necessary changes, ongoing investment is required. Therefore, maintaining financial flexibility is vital to seize the opportunities as they arise.
With a more flexible dividend policy that balances shareholder payouts with short-term profit developments, we remain committed to our shareholders while maintaining flexibility. I'd like to start by highlighting our current performance as we announced last week. Net sales for the first nine months of 2025 declined organically by 4% compared to the same period last year, although the rate of decline has improved during the year, and especially in the latest quarter. Excluding the discontinued distribution of SIN, which affected growth in the first half year, organic growth was negative with 2% for the nine-month period. We are on track to deliver on the full year's net sales in the range of DKK 9.1 billion-DKK 9.2 billion. The EBITDA margin fell from 22% in 2024 to 19.9% in 2025, mainly due to lower volumes and changes in product and market mix.
Free cash flow before acquisitions was DKK 448 million for the nine months, supporting our expectation of more than DKK 800 million in free cash flow before acquisitions for the full year. Adjusted earnings per share, excluding special items, stood at DKK 8.2 for the first nine months, and we anticipate this will reach between DKK 10 and DKK 12 for the full year. Before discussing the coming strategy period, I will talk to the financial performance in the recent strategy period. We have increased the size of STG as measured by net sales through acquisitions and by leveraging our growth enablers, retail expansion, international handmade cigars, and nicotine pouches. Although net sales have grown, our margins have declined, and both free cash flow and ROIC are below our desired levels. Since 2020, net sales have increased to DKK 1.1 billion, primarily due to acquisitions, our growth enablers, and tactical pricing.
The EBITDA margin has decreased from its peak in 2021 during the pandemic. Multiple factors contributed to this. While acquisitions had a positive effect, these were offset by unfavorable mix changes and operational challenges. Our operating performance has been affected by declining volumes, a trend impacting the entire industry, as well as internal challenges related to factory closures in Europe and the implementation of SAP. Lower margins and ongoing investments in growth and transformation have led to reduced free cash flow. ROIC improvements have come from retail expansion and acquisitions, but have been offset by lower operational performance. Still, over the strategy period, we have returned over DKK 5 billion to shareholders. We are addressing these issues as part of our strategy Focus 2030.
With a focused approach and lessons learned from the past, we expect to be better positioned to achieve our ambitions. Now I will focus on our strategy Focus 2030. We will assess the financial success of our strategy using three distinct KPIs, each carefully aligned with shareholder feedback. These KPIs directly reflect our Focus 2030 priorities, emphasizing the need for investments that drive both top-line growth and margin improvements. ROIC is key for us to measure how effectively we convert invested capital into operating profits. This aligns with Focus 2030 of disciplined investments and value creation, ensuring every investment, whether in assets, acquisitions, or in projects, contributes positively to shareholder returns. EBIT is critical for improving ROIC and demonstrates our ability to enhance underlying profitability through stronger profitability, effective cost control, and optimized volume and mix strategies. We have chosen EBIT as a key KPI instead of EBITDA.
Since EBIT is a denominator in ROIC, and as we invest in retail expansion and potentially also in manufacturing nicotine pouches, it is more prudent to use EBIT because it reflects depreciations. Free cash flow remains the most important source of funding for our strategic priorities, maintaining our flexibility and enabling sustainable dividend payments as well as share buybacks. I will now discuss each of our metrics included in the financial ambitions. Our ambition is to achieve at least 11% ROIC by the end of the strategy period. We are making deliberate choices as part of Focus 2030. These choices require clear prioritization, with ROIC serving as a key KPI to evaluate our investment decisions. One of our main drivers for improving ROIC is growth in EBIT, fueled by our strategic initiatives.
We do not anticipate any special items in 2030, as we have made the necessary investments in both infrastructure and technology in the previous strategy period and in the beginning of the coming strategy period. A critical part of our strategy is tight management of working capital, ensuring it is closely aligned with our strategic priorities. For example, reducing the numbers of brands and SKUs will naturally lead to lower inventory levels. In Focus 2030, we will prioritize potential divestments while acquisitions continue to be an integral part of the strategy. We are also committed to maintaining a disciplined approach, as in the past, ensuring that both acquisition and divestment are accretive to ROIC. Let me turn to the strategic KPI, EBIT. Our ambition for the strategy initiatives is to drive EBIT growth throughout the strategy period.
We are seeing early signs of stabilization in volume declines for both handmade cigars and machine-rolled cigars, and we anticipate a structural decline rate of -2% for handmade cigars and -3% for machine-rolled cigars. Strategic actions such as focusing on power brands, streamlining our brand and SKU portfolio, prioritizing our own brands, and expanding market share will contribute to increased EBIT. We are prioritizing stabilizing the machine-rolled cigar performance now by addressing delivery issues and ensuring reliable supply from the outset of the strategy period. Our retail expansion has proven to be accretive for both EBIT and ROIC. As we continue to develop our nicotine pouch business and grow market share, profitability will shift from neutral to positive. Our technology transformation is scheduled for completion in the beginning of 2027, which will further support business performance and allow us to fully focus on strategy and operations.
Additionally, our licensed machine-rolled cigar brand SAIL is projected to return to STG in 2027 with a strong double-digit profit increase. Finally, we plan to achieve cost improvements of DKK 200 million over the next two years. In summary, we are confident in delivering EBIT growth at a low single-digit CAGR over the strategy period, with depreciation amortizations approximately 5% of net sales. The third financial ambition metric is free cash flow. We are committed to generating stronger free cash flow. As previously stated, free cash flow remains the primary source for funding our strategic priorities, maintaining our flexibility, and supporting sustainable dividend payments as well as share buyback. We anticipate an incremental EBIT growth from strategic initiatives, along with the elimination of special costs of DKK 200 million during the strategy period.
We expect to invest DKK 300 million-DKK 400 million annually, with DKK 100 million-DKK 150 million allocated to maintenance CapEx and DKK 200 million-DKK 250 million dedicated to growth and efficiency improvements. Our ambition is to achieve DKK 1.2 billion in free cash flow within Focus 2030. We remain fully committed to delivering strong returns to our shareholders. Since 2016, we have returned over DKK 9 billion through ordinary and extraordinary dividends, as well as share buyback programs. Our capital allocation policy is guided by a leverage of 2.5 times, which determines the level of investments and payouts to shareholders. This target provides us with the financial flexibility to pursue growth opportunities while ensuring solid shareholder returns. It also underscores our commitment to maintaining an investment-grade rating. At the end of the third quarter, our leverage stood at 2.9x .
While we anticipate this will decrease during the fourth quarter, it is essential that we secure a sustainable path to reduce leverage to 2.5x to reestablish our financial flexibility. Looking ahead, we will implement a payout ratio-based dividend policy, closely aligning dividend distributions with our underlying financial performance. This approach will take effect starting with dividend allocations in 2026. As we normalize our leverage, we are creating greater capacity for share buybacks, which have been a consistent request from our investors. I would now like to discuss how our growth initiatives and how they align with our financial expectations or financial ambitions. Expanding our retail footprint is a major priority, and we are committed to accelerating the opening of new stores. The strategy supports growth in the handmade cigar category and contributes to our overall business expansion.
This slide highlights stores that have been operating for more than three years. These established stores consistently deliver strong financial results and are accretive to both group margin and return on invested capital. While there are differences among the individual stores, all achieve a return on invested capital of above 15%. We will use this benchmark to guide our future store openings and continuously monitor each location to ensure our models and value assumptions remain accurate. Régis has outlined our strategic position in nicotine pouches, where for 2025, we expect to exceed DKK 400 million in net sales, representing almost 5% of group net sales. We are seeing a strong market performance, over 13% in the Swedish market, ranking second. In the U.K., our market share is steadily increasing and has now reached 1%.
Gross margin remains between 25% and 30%, and we are currently EBIT break-even with an objective of EBIT to grow during the strategic period. While this segment is currently margin dilutive to group, it offers significant upside potential through increased scale and the insourcing of production. Currently, we have invested approximately DKK 250 million in this business, primarily through the acquisition of XQS. Projecting financial performance for the nicotine pouch segment in 2030 is challenging, as it will depend on regulatory developments and access to new markets. We consider this business successful if we can continue to grow market share, expand into new markets, and consistently deliver financial evidence of value creation. Let me conclude the presentation before we turn to the Q&A session. The strategy Focus 2030 entails a very strong focus on deliberate choices for STG.
We aim for a return on invested capital of at least 11%, EBIT growth at a low single-digit CAGR, and DKK 1.2 billion in free cash flow by 2030. Retail expansion and growth in nicotine pouches underpin these targets. The strategy prioritizes disciplined investments, financial flexibility, and strong shareholder returns, including a shift to a payout ratio-based dividend policy and share buybacks. Thank you very much, and I will hand over to Torben for the Q&A session.
Thank you, Marianne. Before we enter into the Q&A, I think for those that have been watching on webcast and would like to ask questions through the telephone conference, we will just give you a minute or two to reconnect before we get back to the actual Q&A. We will just take a short break here. Welcome back. We are ready to the Q&A answer question.
We would take or will take questions from the telephone conference just in a second, but I can see on the webcast there's quite many questions, both on dividends and margins. I think we'll take at least those first, and I'll try to bundle them into two questions. This obviously is for you, Marianne. Quite many asked around, we have now this payout ratio of 40%-60% payout ratio. What basically determines whether we end up in the 40% compared to the 60% range? Can you kind of talk a little bit also about whether we'll see kind of growth in the dividends as we kind of reset now for next year?
Yeah, thank you, Torben.
Maybe allow me to start a little different and start by saying our capital allocation policy is, as I also said in my speaking, guided by a leverage of 2.5x . We will distribute excess cash to shareholders either by dividend or share buybacks. Nothing has changed in that. What has changed is that our original capital allocation policy was talking about an annual growth in ordinary dividend per share. We have changed that to now a payout ratio, but we are still committed to deliver a solid shareholder return. What determines whether it will be 40% or 60% comes down to performance, but also to our leverage level that is, as I said, guided by the 2.5x .
Whether the dividend will grow over time, we do expect, which we also have noted in the financial ambitions, we do expect that EBIT will grow over the strategy period and also cash flow will grow over the strategy period. That would, as an assumption, also entail that dividends will grow unless we have investments internally that we believe can create even more value.
Just a short follow-up to that, and that is, are we considering making maybe interim dividends, not only annual dividend payments?
No, for now we stick with the annual dividends, and we have no plans of paying dividends several times during the year. Okay, thank you.
Final question for you before we jump to the telephone conference, and that's about the margins because the question relates to, we seem to talk about growth in handmade cigars, growth in nicotine pouches, i.e., growth in net sales, but very limited growth in our EBIT. Basically, are we saying margins are going to decline?
Yeah, it's a good question. Again, our financial ambition, we have decided to focus on three financial ambitions. We believe that growth in EBIT is important and also growth in free cash flow and also ROIC, and that is what is guiding our strategic initiatives. We are also occupied about margins.
If I should give kind of a guidance on margins, the way that I would ask you to think about it is if we look at our machine-rolled cigar business, we need to stabilize that, and we need to stabilize margins in that business. For our handmade cigar, we expect to grow, we expect to grow market share, we expect to open new stores. Here we expect to see an increase in margin. On our nicotine pouches, more difficult. If we look at the business that we have today in those markets where we are today, we expect that they will grow and thereby also margins will grow. As soon as we enter into new markets, they will be dilutive to margin in such a business because we need to invest to establish our market presence in new markets.
Thank you.
I think, Operator, we are ready to take the first questions from the telephone conference.
Thank you. Now we're going to take our first question. It comes to the line of Niklas Ekman from DNB Carnegie. Your line is open. Please ask your question.
Thank you. Can I ask about the DKK 200 million in cost savings that you mentioned here? Can you just, and I know you've said that you're going to come back to this further down, but can you just elaborate a little bit on what type of costs you're looking at reducing? Is this mainly overheads or administration costs, or are you looking at a further merger of production facilities, or can you give us some few details?
Thank you, Niklas, and thank you for the question.
We have determined that it is important for us to establish a cost improvement program of DKK 200 million. As we also said, and you also alluded to, we do not have all the plans yet. The way that I think you should think about it is that it could take out cost in all cost lines in our P&L, both in gross profit, but also in the OpEx line. We will come back, hopefully beginning of the new year, with more details around these programs. I hope that was helpful.
Super, absolutely. Thank you. Second question is on XQS and the strong success you seem to have had in flavors. How worried are you about potential regulation of flavors since that seems to have been a key driver of your sales? What are you doing to kind of mitigate the risk related to that?
Yeah, I can take that question. Of course we are thinking about potential flavor regulation, and that is also why we are increasing our mint capabilities. That part of the plan is also to grow our segment share there. That is our mitigation. The plans are in place with also a lot of the new launches coming into this mint segment. We're preparing for it.
Okay.
Could I maybe, Nicholas?
Thank you.
Can I maybe add to that that I still think that the one market in the world where flavors are least likely to be regulated is probably Sweden because it's such a mature market already with these categories that I would be surprised at least if flavors became a regulatory issue. Thank you.
Okay, that's very clear. Thank you.
Thank you. Now we're going to take our next question.
The question comes live from Sebastian Gray from Nordea. Your line is open. Please ask your question.
Hi, Nicholas and Tom, and thank you for a great Caps Markets Day. First question on the free cash flow guidance on slide 53. It looks to entail a total of DKK 1.5 billion investments between 2026 and 2030, i.e., a CapEx of DKK 300 million per year. I was just wondering, how does this number look throughout the period? Is it front-end loaded, back-end loaded, or, and more importantly, also does this number include potential investments in ramping up own production in nicotine pouches? That would be my first question.
Yeah, thank you, Sebastian. Let me answer that. A main part, what I also said in my presentation is we expect to invest DKK 300 million-400 million annually, but that number will be lower in 2026.
It's important for us in 2026 to get to a more healthy leverage ratio or leverage level around the two and a half times. For the remaining period, we will invest, and it is primarily in retail stores. We are also investing in the Mac Baren integration, so production in Denmark. In this investment, there are not included any production in nicotine pouches.
Okay, that's very clear. At this point, you can give sort of indication what would that sort of investment in nicotine pouches, what would that entail in number?
I don't think we are ready to give such a number for now, Sebastian. It both depends on size and whether it's a new factory or whether it is built in one of the current factories. It is also dependent on, we're not saying that we are insourcing to own manufacturing.
It could also be partnerships that we would go into. I think it's too early to put any numbers to that.
Sure, that's completely fair. My next question for now would be on your earnings bridge on slide 52. That is, you allude to growth in investments and depreciation cessation to increase by DKK 100 million annually. Then you allude to the efficiency program of the DKK 200 million. Does this mean that you net see your cost base to increase by roughly DKK 300 million towards 2030? Is that a way to look at it?
I'm not sure I completely followed all your numbers, but let me try to talk anyway. We will see an increase in depreciation and amortization coming from the investments, but also the investments that we're right now doing in the One Process SAP rollout.
The 200 million that you're talking to in savings program can both be, as I said, in gross profit, but also in OpEx. They will lower the increase in OpEx that are coming from natural inflation. Let me know if that didn't answer.
Yeah, sure, sure. I was just, you stated growth in investments and depreciation amortization to increase about 100 million annually. I say, okay, I compound that by five for five years, then it's 500 million more costs in investments and DNA. I take out the 200 million efficiency. That's how I got to the 300 million number, if that makes sense.
Yeah, our depreciation is not increasing by 100 million annually. Our depreciation is increasing 100 million over the strategy period.
Okay, that's very clear.
My last question is on your previous strategic period and now also alluded to the sort of the optionality in expanding global handmade cigars. I was very kind to show your market shares in the U.S., if I remember correctly, 13%. Could you expand a bit on sort of your position outside the U.S. and how could that market share position look like in five or ten years from now?
Yeah, internationally outside of the U.S., we have grown every year quite considerably over the last decade. In this new strategic period, we aim to continue that. That is still, of course, in the plans. The data is actually not really that readily available internationally. We are estimating that we are at about 6% internationally, which is rough calculations, and a distant number three compared to our main competitors.
I think.
Okay, thank you for.
Yeah, thank you, Sebastian. I think we'll jump to the next one in line if there's any more on the telephone conference.
Yes, of course. Thank you. Dear participants, just a quick reminder, if you wish to ask a question, please press star 11. Now we're going to take our next question. Just give us a moment. It comes to the line of Damian McNeill from Deutsche Numis. Your line is open. Please ask your question.
Hi, good afternoon, everybody. Thanks for taking my questions. My first one is just on the observation on your gross margin in nicotine pouches. I appreciate that there's sort of a margin drag from outsourcing production of a lot of your pouches, but that number looks a little bit low by sort of other industry standards.
Is there anything else that we need to think about in terms of pouch gross margin and how that may improve over time with volume increases? The second question is on, is there any indication about how big your power brands, particularly in the MRC category, will be as a proportion of overall MRC sales by the end of the 2030 focus period? I guess my last question is around the sort of low single digit EBIT growth and just trying to get a sense, this might be one for you, Niels, about how much flexibility you've built in to be able to deliver that over the next five years.
Maybe I can take the XQS one first. Of course, our margins are indeed lower than some of the big companies.
This is because of what you mentioned also that we have outsourced the majority of our production. That is a big contributor. Also, the key KPI for XQS is that we grow market share. That also comes with quite some investments into discounting, into listing fees. That is also suppressing the margin currently. Over the strategic period, that, of course, per can, will lower over the five years. We are not present in the U.S. where it is also about scale. U.S. is by far the biggest market. That combination shows that we have a lower margin than industry standards.
The question on power brands, machine-rolled cigars, what proportion it is going to hit by the end of the strategic period?
The four power brands currently have about 60% of our global machine-rolled cigar volumes.
Signature, for example, is about 25% of our total. We do have indeed the market shares currently. I do not have the number top of my mind what that number is in 2030, but we can always supply that at a later stage.
The margin one,
yes. As I said in my introduction, Damian, I think we are looking at a quite unpredictable future. When you look at our ability to turn our earnings trend around and deliver EBIT growth over the strategic period, it is very, very critical that we stabilize the earnings coming from our combined machine-rolled and smoking tobacco business. That is going to be the big driver in terms of whether we will meet or exceed the current financial ambition. We have put out the ambition that we have because we think that is what we are capable of delivering.
Okay, yep, that's great. Very clear. Thank you, everybody.
Thank you. The speaker turned off for the questions at this time. Please proceed.
Okay, I think we will take a few more questions from the webcast because there's quite many coming in here. The first for you, Marianne, that's on the leverage size because how quickly are we going to kind of deleverage to two and a half? And will we actually, in our aim to get to two and a half, have an even lower dividend in the short term?
Yeah, it is our priority in 2026 to get to the two and a half times in leverage. That will also steer how we invest. I've talked to that in the previous questions. We will not have a lot of investments in 2026, but roll that into 2027.
The dividend on the payout ratios that I was talking to, that is our policy from now. It still stands. That is what we're going to determine the level of dividend in the beginning of 2026.
Thank you. I think, Niels, for you, maybe a few questions on, again, regulation on nicotine pouches. There's one very specific one here. Some European markets have already banned nicotine pouches, like Belgium, or at least planning to ban nicotine pouches. How will this potentially impact our strategy?
Yeah, I think it's important to understand that the regulation of nicotine pouches is not complete. This is one of the things I was talking about in the beginning, that this is not harmonized globally. We see one regulation in the U.S., one in the Nordic areas, and one different one in Europe and Southern Europe.
I think that the scenario that we believe is most likely is that there will be countries that will ban nicotine pouches. We also think that there's such a compelling argument for legalizing these products that we'll see more European countries doing that once they find a reasonable way to do it. We are still confident that there will be an adequate number of European markets for us to compete in. We are just unsure about the timing of that.
Follow-ups on this one is specifically on both the U.K. and Sweden. Do we see a kind of a risk that there will be some bans here or potentially just a flavor ban that could hit us?
I think that nicotine pouches will be no different than the other categories we compete in, that we will see regulation evolve over the years.
Right now, we are mostly occupied with what countries decide individually, will it be legal or not legal, and under what circumstances if it is legalized. Right now, we do not see a lot of pressure in the markets that we are competing in from a regulatory point of view, but that can change.
We shift to another topic that is mentioned here, and that is our potential divestments that is mentioned here. What areas are we thinking about, what markets are most relevant when we talk to divestments?
I think we have bought over the last ten years quite a number of companies, and we are very happy about everything we bought. These acquisitions have also created more complexity. What we have decided now in the context of Focus 2030 is that we will look to divest certain businesses that are less core.
I'm not going to debate what those businesses are today, but we'll have to see how we are able to find potentially better owners of these assets. If not, we'll retain them.
Any special financial criteria that we're going to put into the evaluation?
Whatever we do on acquisitions and divestments, they need to be ROIC enhancing.
We are having a question here also, and that's about our financial ambitions again. How should we look at those as kind of steadily improving over the five years linearly, or how should we think about that?
I've already talked about our priorities in 2026, that there will be around stabilizing our machine-rolled cigar business and the supply going into 2026 and in 2026 get our leverage level to a much more healthy level around our target. That will impact our investments.
It will also impact how much we can push our strategic initiatives and thereby also the results for 2026. The way that I was thinking, I think it is not a linear development from the start, but it is more skewed to the last three to four years.
Okay, and another one on the KPIs here. Our target now is more focused on EBIT rather than EBITDA. Does this actually mean we will also change reporting to EBIT for our reporting divisions?
No, we will not change it. We will measure EBIT on group level and not put EBIT into each of the divisions.
Okay, we still have a few questions here on the web. I just want to make sure if we have any more on the telephone conference. That does not seem to be the case.
I think I'll just continue with the list here we have. Niels, your response on insourcing on pouches was a little unclear to me. EBITDA break-even is not a success criteria, is it? Is it a subscale problem we are looking at? In that case, how much sales should we actually deliver?
Yeah, as I mentioned before, we already own a nicotine pouch manufacturing unit, and we produce part of our portfolio today. We could insource the rest. We have quite adequate volume to build a larger factory than what we have today. This is also, again, something that will take resources and attention. We want to make sure that the day we insource or partner with somebody around the manufacturing, we have all the capabilities we need to do that.
Right now, it's more important for us to show that we can keep driving the top line, that we can show, let's say, the commercial evidence not only in Sweden, but also in other markets. The decision on insourcing is really one that we will determine when the timing is right. It's not a reflection of us not having the scale even today.
Okay, thank you. We still have a few on our nicotine pouch business and XQS. What's the expected pace of rollout into new countries? How many countries could we actually be in in 2030?
We are already in more countries than only the U.K. and Sweden that we have talked about. We have launched in quite a few countries already this year, which is mostly distributed with distributor partners. I mentioned Czech Republic, Poland, Finland.
We have a lot of work to do. The key KPI is that where we go, we are focused and we grow our market share there. We have a lot of work to do already in these countries. We will evaluate on a continuous basis if we should enter a new market. That depends, of course, also on the financial business case, the ROIC, and our ability to actually win in the market with route to market. There is not a specific target for how many countries we will be in in 2030, but we will, of course, evaluate on a country-by-country basis.
Maybe to follow up, and I think it's more for you, Niels, but talking about the potential new markets, there is a question here about our kind of position around the U.S. market because now we're talking about the regulatory kind of, what do you call it, blocks on the road for us in Europe potentially. Why not focus then on the U.S. full speed ahead?
Yes. I have explained before that the biggest challenge we have with respect to the U.S. market is we do not have the XQS trademark. We own that in every single country except for the U.S.. We could launch another trademark, but we also do not have an FDA-approved product.
Whereas we follow the U.S. and the regulation in the U.S. very carefully because we do obviously see the potential of that market, the strategy clearly outlines that we will focus on Europe first, and then we will keep an eye on the US. If things change, we will come back and explain if we start to get more concrete plans. For now, the focus is Europe. The U.S. is interesting, but we are waiting.
Thank you. It is about XQS and the rollout in both Sweden and U.K. because the one asking the question here basically got the impression we do not have a 100% rollout distribution in these markets. Could you give kind of an idea of how well-penetrated we are in this market? I.e., is there an upside here?
Maybe also touching a little bit on the other markets that were mentioned where we are active today.
Okay, let's take it market by market. We have three markets where we have our own sales force pushing, of course, XQS. Sweden, we're actually at a very high distribution margin, both numerical and weighted. There we're good. The increase of market share that we're seeing currently is about rotation on the shelf. Denmark, we have not talked much about that. We also crossed the one percentage point share there. Together with ACE and GRIT, we are actually at 4.5%. There are also distribution. It is a very high level. If we then go to the U.K., that is, of course, a much larger market. It is key count based, but also a huge part is the independent channel.
There we are definitely not yet at full capacity. We have KPIs that show when we can accelerate, and we will evaluate that, of course, when we reach each deadline of deadline KPI. Sorry. A follow-up for the same person, and that is about the 13% market share in Sweden today. What are we going to hit in 2030? If you look at each month, we are increasing nicely at the same pace. What we are looking for in five years is to have a 20% share or higher. That is the target that we have put in place.
I think we have one more question, and that is probably for you, Niels. We are not talking much about acquisitions. What is our stance on this? That was part of rolling towards 2025.
Yes.
Acquisitions are still part of our strategy, but it's also clear that we have built quite a lot of complexity over the years with what we bought. On the one hand, we really want to exploit the opportunities and the companies we bought. On the other hand, we still want to make acquisitions. We just want to be more selective. It's still in the plan. It plays a not so significant role, but it's still there.
Thank you. I think that basically concluded the list of questions from the webcast, and I don't get kind of a message there's more on the telephone conference. That basically concludes this Capital Markets Day from our side. We're pleased that you have joined in, and we definitely want to do whatever we can in order to fulfill all our aims and objectives with this Focus 2030.
We will be back and talk more in detail, of course, in relation to the Fulya report next year. If you have any further questions, would you like to reach out? You're more than welcome to do that to me or Eliza from Investor Relations, and we'll be more than happy to assist you. With that, thank you very much.