CEO, Scandinavian Tobacco Group A/S
Group Overview and Strategy - Niels Frederiksen
... and scandinavian tobacco group is first and foremost a cigar company and our vision is to become the undisputed global leader ...
About Niels Frederiksen
Niels Frederiksen, CEO of Scandinavian Tobacco Group, stated in a November 2021 presentation that the company's vision is to become "the undisputed global leader in cigars." He described the company as "the strongest company in the cigar industry" and said it is "better positioned than any other company to further consolidate the industry," citing financial strength, expertise, and intention. Frederiksen noted that the company has moved to a "new level of capacity" for acquisitions due to improved earnings and control of the business, and he pointed to the Agile transaction as an example of how regulation has created M&A opportunities. Frederiksen emphasized that Scandinavian Tobacco Group is "not a mainstream tobacco company" and avoids direct competition with large tobacco firms. He discussed the company's strategy to "premiumize" the handmade cigar category, describing it as a luxury category accessible to a broad range of consumers. Regarding new categories, Frederiksen said the company is exploring areas such as smokable hemp, with a test launch of a "Versa" product in three to five U.S. states, describing it as a niche market for a non-nicotine smoking experience. He also highlighted ongoing efforts to professionalize the business, including implementing a global SAP system and upgrading skills in digitalization and strategy execution.
Transcript (14 segments)
N
Niels Frederiksen0:03
Good afternoon to everyone here in London and everyone on the live stream. My name is Niels Frederiksen. I've been the CEO of the company since 2015, but I've been with the company for more than 20 years, covering almost all functional areas. I wanted to start today with this purpose video because I wanted to share with you one of my favorite smoking rituals of a good summer. Every weekend there's a football game on, and my team FC Copenhagen plays. If I'm not in the stadium, I will be in my summer house on my veranda with my iPad watching the game. As I prepare for the game, I'll brew myself a strong cup of coffee, go to my humidor, and look for the perfect cigar for the game. I'll always pick out a number of cigars because picking out just the right cigar for that match is not as easy as you would think. But at the end, I'll choose one, bring it along with my cup of coffee, settle down in a nice comfortable chair ready to watch the game. Then I'll bring out my cutter, my favorite lighter, and start the slow process of lighting up that cigar and enjoying it throughout the game. That's one of my favorite rituals as a cigar smoker and one of the things that make me a much nicer person to be around.
We'll come back to rituals, but first let me talk about who we are. Scandinavian Tobacco Group is first and foremost a cigar company. Our vision is to become the undisputed global leader in cigars. We are already a leader, exporting to around 100 countries. We have strong market positions in the US and Europe, where about 90% of all cigars are consumed. We also operate the most successful online and retail business for handmade cigars in the US. The handmade cigar is a unique segment where we can compete across multiple parts of the value chain and win. For machine-rolled cigars and smoking tobacco, our focus is on optimizing market share based on a strong portfolio of brands.
Let's look at why we think Scandinavian Tobacco Group is an investment worth considering. As a leading player, we have delivered consistent performance since our listing in 2016, strengthening margins and cash flow. Our strength is based on a strong portfolio of brands with many number one and number two market positions. Based on consumer insights, we have implemented disciplined price increases offsetting market declines. We have focused on optimizing and simplifying the business, leading to margin improvements and stronger cash flow, forming the basis for a strong capital allocation policy. I believe we are the strongest company in the cigar industry, better positioned than any other to further consolidate the industry. We have the financial strength, expertise, and intention to do so.
Let's look at our role in the bigger tobacco market. We are a niche tobacco company focused on rituals and smoking enjoyment. The quality of tobacco matters to us; we create new smoking experiences with craftsmanship. We are not a mainstream tobacco company and avoid head-to-head competition with big tobacco. We have a well-balanced portfolio across product categories and geographies, which mitigates risk from regulation. We believe in the sustainability of the cigar category: it has an older consumer base, is smoked less frequently, and more for enjoyment. Many cigar smokers are dual users of other tobacco or nicotine products.
Let me introduce some of our fine brands. In handmade cigars, we are number one in the US and number three globally outside the US. We own Cuban trademarks in the US such as Cohiba, Punch, Partagas, Hoyo. Outside the US, we own strong brands like CAO and Macanudo. We are the market leader in the US, competing across all segments from value to super premium. Outside the US, we need to strengthen our brand portfolio to invest more in globalizing our handmade cigar business.
In machine-rolled cigars, we are number one outside the US and almost non-existent in the US for historic reasons. We have a great assortment of brands competing across all meaningful segments. Our job here is to reduce the number of brands to a core set required to compete and win.
Let's talk about regulation and how we use it to our advantage. We have decades of experience dealing with and adapting to new regulation. Our categories remain more leniently regulated than cigarettes. Our success is based on in-depth understanding of potential regulation, preparing from a supply chain perspective and adapting consumer propositions. This makes us a trusted partner for customers who need guidance when new regulation is passed. Our core focus remains the US and Europe, where we work directly or via trade organizations with legislators to ensure they have the best information. New regulation is both a challenge and an opportunity; it is easier for us to handle than smaller competitors and can trigger acquisition opportunities.
Let me turn to our sustainability strategy. Responsibility is embedded in Scandinavian Tobacco Group as a core value. In 2020, we launched a new sustainability strategy focusing on four core areas: people and communities, the planet, sustainable business ethics, and governance. However, in 2021 we realized we needed to raise our ambition further. We have been working on the next generation of our sustainability strategy and will come back within the next three to six months to show how we intend to accelerate our efforts.
Let's turn to our performance over the past five years. Scandinavian Tobacco Group has been on a journey to transform itself into a more professional, consumer-oriented, and scalable business. We have implemented a number of initiatives: moving from a decentralized to a global operating model, increasing commercial people in executive leadership, investing in consumer insights, upgrading skills in digitalization, lean procurement, strategy execution, and planning, and starting a global SAP implementation. Since listing, we have significantly improved the size and profit of the company, with stronger margins and healthier cash flows, delivering attractive returns to shareholders.
Before talking about the future, let me talk about Scandinavian Tobacco Group in a longer perspective. People often ask if life in the tobacco industry is difficult with all categories in decline. I say yes, it is challenging, but the people who join us join a team with ambitions and a history that proves we can build a bigger company even in a challenging industry. Since our divestment of cigarettes in 2008, we have more than tripled the size of the company, more than quadrupled earnings, and delivered significantly stronger cash flows. Our strongest argument for future success is our history. We intend to build a bigger business and become the undisputed global leader in cigars. When you join us, you join with a growth mindset, not a mindset of managing decline.
Let's look at our updated strategy. To a cigar smoker, cigars matter. That's why we have put rituals at the center of our new strategy. Rituals are a critical element of what we do. In a fast-moving society, rituals matter, whether it's a cigar, a pipe, a cup of coffee, or something else. Our updated strategy is a commitment to our core cigar business but also a recognition that we need to look outside the cigar business into the wider tobacco category for opportunities where we can meaningfully play and win. Our growth incubator is a commitment to deliver better organic growth going forward. We continue to believe growth is possible through acquisitions and organically, partly through our core cigar business, as evidenced by our announcement today about expanding our US superstores, and also in new categories.
Our five must-win battles are our key priorities where we put the bulk of our resources. First, we see the biggest organic growth opportunities in handmade cigars, evidenced by the announcement of new stores and a higher level of globalization. The impact of COVID-19 on handmade cigar consumption shows that when we engage with consumers better, they engage back, supporting the long-term sustainability of the category. Second, our machine-rolled cigar business is in better shape than ever, and with the acquisition of Agile, we have a stronger base to optimize and prepare for the next acquisition. Third, making acquisitions and integrating them at high speed is a must-win battle; we are satisfied with our latest two acquisitions, which have been highly value accretive. Fourth, we aim to be the most cost-effective operator in the cigar business and best in class in working capital to release surplus cash from acquired companies. Fifth, we constantly work to simplify the company, covering processes, brands, categories, and organization. Our global SAP implementation is the single biggest commitment to simplification, supporting standardization, automation, and cultural transformation. Finally, we need to create a performance culture that attracts individuals with a growth mindset who embrace challenges and change.
Let me quickly cover what the team will go over today. We will show that Scandinavian Tobacco Group is a market leader with a successful history of strong financial performance and industry consolidation. We know how to navigate increasing regulation and grow the company. We are focusing on professionalizing the company, allowing us to leverage our experience and financial firepower when opportunities arise. Our focus will continue to be on combustible products, but we will also start looking at other emerging categories. We use our craftsmanship to create the best consumer propositions across categories. We continue to believe in the importance and passion around tobacco and smoking experiences. We have a proven M&A strategy with successful acquisitions and room for further consolidation. We firmly believe no other company is as well positioned to win in this industry, and we continue to pursue our vision of being the undisputed global leader in cigars.
Let me finish with a few words on our management team. Since I took over in 2015, I have worked diligently to put together a diverse leadership team that can execute our strategy and achieve our vision. I focused on a team with the right combination of industry insights, functional expertise, and intellectual capacity. I believe we have a battle-tested leadership team ready to take Scandinavian Tobacco Group to the next level of performance and develop a sustainable business for the future. Thank you for your attention. I'll give the word back to Torben for the next point on the agenda.