Q&A - Niels Frederiksen and Graham Cunningham

For that question, I think what we have said over the years: cigars is our core business and where we will put most of our effort and most of our money. But we are also seeing that with the development that is taking place in the wider tobacco categories, there are all sorts of new opportunities emerging. And on the one hand, we have the view that we should not be competing head to head with big tobacco. On the other hand, we are also convinced that there is going to emerge opportunities where we can meaningfully play and win, and these will typically be, you know, niche segments where there's a higher component of an enjoyment, typically a little bit of an older consumer profile, and that's what we're looking for. We also think it's naive to think that we can, you know, live off cigars alone. We think we need to supplement it with some of these other categories, and we think we haven't seen, let's call it, the last invention in that area yet.

Yes. So, if we start first around the new categories, I think that, you know, we've said before and I'm happy to say again, we are not going out and investing a lot of money in this. So we are going to explore these categories. We're going to start experimenting. And the best example is really our Versa Hemp product in the U.S. We're talking about a test launch in three to five states in the U.S. on smokable hemp, the non-intoxicating part of the cannabis plant. We think there is a niche market for consumers that wants to smoke a non-nicotine product with a nice smoking experience. It's sold at a relatively high price. We think that's a way of testing, you know, can we be in that particular segment? Now, could there emerge acquisition opportunities over time? I think the answer is yes. But I'm also thinking that we would want some level of evidence before we put a significant amount of money behind that. It is not an area where we are going to be, let's say, overly bold. So we are, you know, we are taking a cautious approach to it, but we think we need to build some of these new income streams in new areas as well. If you look at the general M&A landscape, I think the best way to describe it is that the industry is not bigger than we are in contact with everyone. So if there's anyone who is looking to divest their business, they will know that we have an interest. But this also does not mean that we can automatically, you know, generate more acquisitions faster, because it's really different things that end up triggering versus different divestments. Sometimes it is, you know, a new generation having to decide whether to step into the business or not. Sometimes it's new legislation. And sometimes it's just, you know, people not liking the risk profile of the business. What I can say is that we do believe that with the acquisitions we have made and with the progress we are making in the earnings of the company, we have moved ourselves to a new level of capacity. So we can actually afford more acquisitions today based on basically being in better control of the business, making it, making more money. Um, so from that perspective, we believe we're in a better position, or we're more ready than we've ever been for acquisitions.

I think that if you look at the Agile transaction, I think that transaction is a good example of multiple factors being in play. It's seldom one particular thing. But so, for Aragon, it was really a combination of the risk profile of the industry versus the alternative use of money inside their own company. They had over the years built a secondary investment vehicle into industrial products, and they wanted to take some more money from the tobacco business and move it into the industrial part. And they were feeling increasingly uncomfortable with the risk profile of tobacco. And this was especially related to a few big markets where they have a big exposure. If you go a few years further back, we did buy a Belgian company called Farrell back in 2014, and there the owners basically said, 'You know, we are not going to implement TPD2. We don't really want to bother, so we'll sell the business.' So it's a number of different things. But we are somewhat surprised that we've not seen more M&A opportunities come up from new regulations, but we are hoping that they will come in the future.

Yes, so obviously we are very occupied with planning as well as we can for the SAP implementation. But we also have the fundamental view that we cannot control when the big opportunities arise, and we basically have to manage our way through a situation. Again, we always remind people that just because we buy a company, it doesn't mean we automatically need to integrate it on day one. We have flexibility on how we can organize that, and we would certainly not want to let an attractive M&A opportunity pass because of the SAP implementation. So that's our, let's say, our view on the issue of priorities. When it comes to where would we prefer to see the next transaction? And here I would say that if we had to choose, we would rather do more in the handmade area right now, and especially things in the handmade area that would support further globalization. But we will take any type of transaction that we believe is right for the business long term. But that's probably where we would prefer it if we could use it ourselves.

So, you know, handmade cigars is a luxury category, luxury category, but it's also a category for everyone. So the U.S. is two-thirds of global consumption of handmade cigars, and it's a category consumed, you know, from three dollars up to more than a hundred dollars. So luxury is certainly an element of this category, and we do everything we can to premiumize the handmade cigar category. And it's very appropriate that we brought along with us today Sean Williams, who is our Cohiba brand ambassador, and he'll be happy to talk to you about some of the latest initiatives we've done, which is basically placing more, you know, $250-plus cigar products out there and selling them. So we are doing as much as we can to premiumize, but it's also important to remember that it's people from all types of life that smoke handmade cigars, and it's something that actually brings people together across income barriers or boards.