North America Branded & Rest of World - Régis Broersma

Good afternoon everyone here in the room and on the live stream. My name is Régis Broersma, and I'm actually already closing in on about 20 years in the company. I've had many positions and actually left the group in six countries. I'm waiting for Nielsen's call to send me somewhere else again. So, let's start. Currently I am leading the North America Branded and Rest of the World division. In the next 15 minutes, I will give you some insights on what my division is all about. It covers all product categories and a very wide range of markets, about 100 markets. So, the key takeaways I would like you to remember at the end of the day: first, we are the leading provider of handmade cigars in the US, and we're actually growing very fast internationally. We do that because we have an unrivaled portfolio of superbrands that resonate really well with our consumers, so very strong brand equity. Third, we are investing in handmade cigars and will continue to invest in handmade cigars. This is our must-win battle, and our future growth is actually coming from this category, very much focused on handmade cigars and on the US. There's a whole wide range of rest of the world, and there are plenty of net sales opportunities there, which I will come back to later. But also in some of the markets where there's very high regulation, it's all about maximizing EBITDA. So these are the four key takeaways.

If we then look a little bit at the financials, about one-third of the group's total net sales comes out of this division, but with very high margins and a very low opex base, we actually convert that to very high EBITDA. So 43% of the group's EBITDA comes out of this division. If you look on the right side, there's steady growth in net sales, and the growth in EBITDA is even faster. Especially in the first nine months of 2021, there has been a big jump, and we're now crossing the 40% EBITDA margin in this division. The question might be, what is causing the jump in 2021? It's twofold. One is that we're actually reaping the benefits of many of the strategies we put in place over the last two years, some of which I will come back to later. Second, it is also COVID. Some parts of the group have been negatively impacted, some parts positively. Two areas that positively impact this division are handmade cigars: people are more at home, so there are more smoking occasions, so there is a bit of a mini boom. The second is that all the airports and borders are closed, so consumers buying their products in lower-cost channels are now moving domestically. They are forced to buy domestically, where we have higher invoice pricing and higher margin. So these two reasons are driving the uplift in 2021.

So then about the markets. As the title of the division already says, there are two main regions: one North America, the other Rest of the World. If you look at North America, in Canada we have very high market shares, one of the biggest sales forces in the group in Canada, very high regulation, very high excise, and a very strong position in market share. If we then look at the US, we have five key business units there. One of them is focused on our mass market products and servicing the convenience channel. Then we have four business units that actually sell handmade cigars. Two of them sell our own brands direct to our retailers, and two business units are basically wholesale business units that sell our own brands but also competitive brands. Then we have Rest of the World. There we have our own sales organizations in Australia and New Zealand. Like Canada, it is a very strong position where our own sales force is highly regulated, high pricing, high excise, so very similar. And then basically all the other roughly 100 countries, we have a full distribution network in place, so it's not our own sales forces; we use distributors. The main region that contributes to the sales there is the Nordics, and especially Norway is contributing a lot to the net sales in this part of the region. An interesting part here also is contract manufacturing. We put a team in place about a year and a half ago that specifically focuses on selling idle capacity to basically big tobacco. We had a five-year strategic plan that last year we already achieved, so we have to have a new strategic plan. This is all about filling our capacity and actually making our factories green and happy, running a more efficient operation.

Then the categories. I think this division is fairly equally split between the different categories, but if you look in the two regions, very, very different. North America is very cigar-focused: US handmade cigars, Canada machine-made cigars. If you then look at the Rest of the World, it is basically an equal split between smoking tobacco, machine-made cigars, contract manufacturing, accessories, so each one third. Very different setups. Then let me walk you through this slide. Here we show how each area is contributing to the division's net sales, the growth for the future, and how it contributes to the average gross margin of the division. Let's start on the left side. About a little bit more than 50% is actually being sold via North America, and the biggest chunk there is handmade cigars with 26%. Rest of the World a little bit less than 50%, and the main driver there is the Nordics, especially Norway, with about 10%. The conversion to EBITDA is even higher there, so a very important market for us. So where does the growth come from in the future until 2025? That is from handmade cigars. It is one of our must-win battles, that's where we invest, and that's where we expect the growth to come from. Another one is other markets. There are, as I said in the beginning, net sales opportunities in different pockets: in South America, in Asia, and also in contract manufacturing. Then the other areas like US mass market, Canada, the Nordics, Australia, and New Zealand are characterized by very high regulation, plain packaging, dark market, high excise, and the markets are a bit under pressure, so that's why this one's a little bit lower than the average growth of the division. If we then look at gross margin, basically all the areas contribute positively except for other markets. The reason is that we have a distributed network there, so we sell at lower invoice pricing, lower margin, but we don't have the opex base because we don't have our own sales force there. And then on top of it, of course, we have contract manufacturing, which in business model is always at a lower margin in itself.

Then what should drive the growth of the division? We basically based it on three pillars. One is accelerate handmade cigars globally, with focus on the US and with a very strong brand portfolio. The second is what I mentioned: in markets where we have higher regulation, we need to maximize for EBITDA, so pricing, design to value, simplification, opex reduction. And with releasing that cash, we can actually, with keep it at number three, invest in net sales opportunities across the group but also within the division. On the next slide, I highlighted for each three main initiatives that we have initiated and also executed in 2021. I will not go through all of them; I will pick two. The first one is the launch of Forged Cigar Company in February 2021. Before that, there was one selling company selling all our handmade cigars, James Cigar Brands. The basket was so big that when the sales rep came to brand number five, six, seven, eight, the customer was really like, 'Okay, this is too much.' So brands like La Gloria Cubana, Partagás, Alejandro Mundo didn't get the attention they deserved, so it didn't release the potential of those brands. So what we did is we moved those brands to a nationwide new company called Forged. Since now nine months, it has surpassed every KPI we put in place. As a result, we are now expanding with new feet on the street. Great success story. Then on the right side, we have Versa Hemp. Niels was so kind to already discuss it. This is coming out of the growth incubator. There we have now a dedicated team, and this is where we combine the skill set and expertise we have in blending and casing of pipe tobacco for more than 100 years with hemp flower, and it truly creates a unique smoking experience. Still small, with the potential to be a very profitable category in the future.

So let's deep dive a little bit into the US handmade cigar market. On the left side, you see some of our power brands like Cohiba, La Gloria Cubana, Partagás, Alejandro Mundo. He does sell the 250 cigars, which is great, which we launched last week. On the right side, you see some of the competition: Davidoff, Oliva, Altadis, bigger companies, and then you have a lot of boutique companies also. With the split into two cigar companies, we have two selling organizations, and we can both fight and win versus the big companies and the boutique companies. Then the total market in the US, we have estimated that now at 360 million cigars in 2020. That has increased. The great thing is we have increased with the market and actually outperformed, so we now hit 100 million cigars sold in STG handmade cigar brands in the US. That's a very nice milestone.

Then the channel distribution. Where is handmade cigar sold? On the left side is the total market: 40% of all handmade cigars are actually sold in retail brick-and-mortar, mom-and-pops, liquor stores, and 60% is sold in the internet catalog channel, of which Sarah will come back to; she holds about 50% of that. 40% retail is extremely important. If a new consumer comes into the category, they will first go to the retail channel, get advice, get educated, and over time they migrate to the online channel. So really important that we are present there, that we intercept the consumer for the future. Then on the right side, we focus on the 70% because Sarah focuses on the other 30%. Within that 70%, our split is on the right side. Here we see a quarter is basically internet catalog service competition, and 75% goes to brick-and-mortar retail, either via distributor or us directly supplying it. So it's a very high percentage, which is great because this is where we intercept that future consumer.

Then the great thing about the US is there's not that much regulation yet in consumer engagement, so there's a lot of things possible still. That's why each of our brands has a 360-degree consumer engagement program where they have to touch on these six items on the screen here. Just a few examples: innovation and collaboration. Very often when a consumer comes into the store, he or she will ask, 'What is new?' There are 10,000 products on the shelf, but they want to know what is new. So innovation is extremely important, and we have upskilled our capabilities there and increased the percentage of innovation. This is tobacco innovation, packaging concept innovation, but also collaboration with other companies and brands that are affinity brands with some of our brands. That can be Weller, Rabbit Hole Whiskey, Ashton accessories, Louis XIII. Then we have sponsorship and experiential. A good example there is Barstool. Barstool touches one out of three millennials in the US, so very, very powerful. We just finished our one-year program with them, and also there all the KPIs we set we have overachieved. So a great vehicle where we are actually capturing our target group. And then the last one is digital, social, influencers, all connected. Here we upscaled a lot in the last couple of years. Each brand has Facebook, Instagram, Twitter, name it, they have it. And we actually all put it into CigarWorld.com, which is an overarching platform where all our consumers can go, our current consumers and our future consumers. I can talk hours about this slide, but sometimes a small video says more than a thousand words.

[Music] So, the original video was actually also a few hours, but a million is good. So thank you very much. I'm more than happy to answer questions later, but for now, back to you.