Scandinavian Tobacco Group: What If?

“We have set a clear direction of prioritizing our investments, putting more emphasis on our power brands. We’ve taken steps to reduce complexity in our organization and in our portfolios, and we started to execute on our plans to deliver cost improvements as part of achieving our financial ambitions.” - Niels Frederiksen, CEO, STG, Q1’26 Remarks

STG’s Q1’26 report was refreshing. But perhaps that refreshing feeling is only because of remembering we no longer have to deal with the bad pun of “Rolling Towards 2025”, which, execution, in hindsight, was more akin to rolling, nay stumbling, down a hill. Replacing it is Focus2030. Has the company found its footing?

As nice as it would be to have definitive conclusions, Q1, a light quarter every year, offers little in the way of concreteness. However, there are positives beginning to emerge. The group is closer to market stabilization in key markets, secular decline rates have been sustained at expected levels, and new efforts, such as the still-nascent nicotine pouch business, offer genuine avenues for absolute growth.

Unfortunately, many figures need to be taken with a grain of salt. Issues arising from the start of the SAP/ERP rollout caused significant pain, as demonstrated by the EUB segment. Such muddied waters include marked improvements in MRC and tobacco gross margin despite negative net sales growth for those products. Likewise, footprint rationalization of Ace and GRITT, and the prioritization of XQS, led to even more pronounced moves in NGP metrics: gross margin climbed from 23% in Q1’25 to 35.2% in the period, despite organic category sales dropping by 23%.

Handmade cigars were a surprising standout category for the quarter. Organic net sales grew by 8%, supported by strong sales in group-owned superstores and the online channel. Margins remain under pressure, as expected, due to industry-wide responses to the impact of tariffs. Could this provide unexpected upside sometime in the coming quarters? In February, the U.S. Supreme Court ruled that certain tariffs were unlawful. Establishing that previously paid tariffs could be subject to refund points to the potential of STG receiving a non-trivial reimbursement. The U.S. Customs and Border Protection opened a formal refund process, which the STG is actively assessing.

For the full year, special items will be lofty, higher than FY’25 and guided to a level closely matching FY’24. OneProcess remains a key contributor, and new costs associated with the Focus2030 initiatives have been introduced. As we move through this year and the next, costs associated with integrations will taper off, providing a critical read-through for the evolution of underlying earnings.

Of course, there is always more to look at. Recently, a number of readers have reached out, seeking perspective on the implications of potential U.S. actions against Cuba and the theoretical subsequent elimination of the embargo. Let’s have at it.

What if?

I find most of the time spent pondering “what ifs?” surrounding geopolitics to be a waste. The variables are often innumerable, and, even if you have accounted for those that will move the needle, specific outcomes can rarely, if ever, be guaranteed. With that said, in this instance, there are several interesting implications for Scandinavian Tobacco Group.

The current U.S. administration has created a cloud of uncertainty with grand geopolitical actions. Following the strikes in Iran, what might come next? It should come as no surprise that the administration has been exploring pursuing actions against Cuba. In recent weeks, those ideas have transitioned from merely passing thoughts to more significant considerations. Let us rewind to gain context.

On September 15, 1960, Fidel Castro nationalized the Cuban cigar industry by having his revolutionary army seize factories, warehouses, and other related real estate. Two years later, President John F. Kennedy signed an embargo against Cuba, Proclamation 3447. This severing produced dire consequences. Many U.S. domestic manufacturers that were reliant on Cuban leaf were forced to close their doors for good. Others pivoted, producing impressive fortunes. Cuban families who lost their livelihoods when their cigar operations were seized fled, establishing new operations in Nicaragua, Honduras, the Dominican Republic, and Mexico. Ever since, the prestigious Habanos have been absent from the most lucrative cigar market in the world, the United States. What happens if that changes?

Let us suspend consideration of how that change happens. As mentioned, factors specific to a given scenario can be endless, and estimating such a timeline can prove similarly problematic. Mind you, in January of this year, President Donald Trump signed Executive Order 14380, declaring a national emergency, marking Cuba an extraordinary threat, and authorizing new tariffs on goods from any country that directly or indirectly sells or provides Cuba with oil. In May, Executive Order 14404 was signed, imposing additional sanctions “on Those Responsible for Repression in Cuba and for Threats to United States National Security and Foreign Policy.” The current administration seems to favor the embargo and related measures, and support for additional actions may be limited following what has unfolded in Iran. We can ignore those factors. For our purposes, let us pretend that significant actions against Cuba are immediate and conclude just as quickly. Let us assume that the Cuban cigar industry faces no new imposition from those actions and, whatever the resulting state, the embargo has evaporated into thin air.

Would this not be catastrophic for Scandinavian Tobacco Group? As if overnight, Cuba would flood the U.S. market with its premium cigars, taking a massive chunk of the market and providing STG no time to react. STG’s volumes, margins, and profits would all collapse in short order. I believe this is the most common narrative. It is worth questioning.