Scandinavian Tobacco Group A/S

CSE:STG

Earnings Call Transcript

[Niels Frederiksen, CEO, President & Member of Executive Board]

Good morning, and welcome to Scandinavian Tobacco Group's First Quarter 2020 Webcast and Conference Call. My name is Niels Frederiksen, the CEO of the company. And with me today, I have as usual our CFO, Marianne Rørslev Bock; and our Head of Investor Relations, Torben Sand.Please turn to Slide #2. The agenda for this conference call covers the key highlights for the first quarter of the year; an update on key events, including an update on the COVID-19; and the integration of Agio Cigars; an update on the performance in our 4 divisions; key financial developments for the quarter; before we will conclude the call with an updated guidance for 2020 and the usual Q&A session.Before I start, I'll ask you to have attention to our disclaimer on forward-looking statements. The complete disclaimer can be found in the appendix to this presentation.So please turn to Slide #3. Without any doubt, events during the first 4 months of the year have been significant and extraordinary. The outbreak of COVID-19, the suspension of our financial guidance for 2020 and the announcement of the integration for the acquisition of Agio Cigars, each 1 of them big events.But before moving on to these 3 topics, let me start by presenting some of the key financial numbers and developments in the first quarter. We delivered a 5% organic net sales growth, an organic EBITDA growth of 23.9% and a free cash flow before acquisitions of DKK 122 million. Although the performance was inflated by phasing and hoarding of products, the underlying performance was satisfactory and in line with our original expectations with organic net sales growth being slightly positive and organic EBITDA growth being mid-single digit without these phasing impacts.In April, net sales has been adversely impacted by these same impacts, just as the impacts from COVID-19 have been more profound. In order to give the market a better insight into the COVID-19 impact on our financial performance, we are also releasing the year-to-date net organic development in net sales to April. For the group, the year-to-date organic growth was 3% compared with 5% for the first 3 months.Based on the April numbers and the general increase in visibility, we have the increased visibility we have into the second quarter. And the remaining part of the year the country is gradually starting to reopen, we find it appropriate to release an updated guidance for the full year. We'll come back to that in the end of the presentation.We have communicated the financial implications of the integration of Agio Cigars. We are confident that the acquisition and integration will add significant value to our company and to our shareholders when integration is completed by the end of 2022.Please turn to Slide #4. Let me give you a few financial highlights for the first quarter. Organic growth in net sales was positive by 5%, driven by strong growth in Region Machine-Made Cigars and Region Smoking Tobacco & Accessories, but also positive but lower growth in the 2 other divisions. However, it is important to emphasize that growth was boosted by phasing ahead of excise increases and some hoarding ahead of COVID-19 restrictions, impacts that partly will reverse in the second quarter. Nevertheless, the underlying organic net sales growth is slightly positive for the quarter, which is in line with our original expectations. The phasing and hoarding impacts also explain most of the 24% organic EBITDA growth. Excluding the impact from phasing and hoarding, we estimate that growth would have been mid-single digit, also in line with our original expectations.Finally, the free cash flow before acquisitions was positive by DKK 122 million for the first 3 months compared with DKK 72 million in the first 3 months of last year. The improvement was driven by increased operating performance. In the 2 charts, you can see that the 12 months rolling organic growth rates have continued to improve, with organic net sales growth almost reaching 0% and organic EBITDA growth reaching almost 10%. However, the outlook for the second quarter of the year indicates that the improved trend will be broken for both metrics when we report on the second quarter in August.Please turn to Slide #5. On March 19, we suspended our guidance due to the lack of visibility to our financial performance for the rest of the year. At that time, restrictions were introduced to consumers and retailers. Orders were being closed, and we had limited insight to potential changes in consumer behavior, potential disruptions to our supply chain and most importantly, for how long these uncertainties will exist.Based on these observations, we believe that it was most prudent to put our financial expectations for 2020 on hold until visibility improves sufficiently, even though our financial performance for the first 2 months of the year was in line with our expectations. Week by week, the visibility has improved on the development and the financial implications, and we've decided to share with the market the development in net sales, including the month of April to give you an -- as up-to-date as possible status on our performance.For the first 4 months, North America Online & Retail delivered 6% organic net sales growth compared to 0 for the first 3 months. Hence, April delivered a strong growth in net sales, clearly illustrating the significant change in consumer purchasing moving from physical trade to online purchasing in the U.S. handmade cigar market.North America Branded delivered minus 4% for the first 4 months compared with plus 3% for the first quarter. A substantial decline in net sales in April was driven by the closure of specialty cigar stores across the U.S. and a substantial slowdown in Canada, where hoarding had also been meaningful in March.Region Machine-Made Cigars delivered 1% organic net sales growth January to April versus 5% in the quarter. The first quarter was strong due to phasing and hoarding of products, partly also explaining the lower organic growth in April. Underlying demand for our product has been negative in April, but not materially so.Smoking Tobacco & Accessories delivered 6% for the 4 months versus 12% for the quarter. Here, net sales was also partly phased towards the first quarter, where especially Denmark saw a significant loading ahead of a steep excise increase. Overall, the group organic net sales growth January to April was about 3% versus 5% for the first quarter.Please turn to Page #6. We are wiser on the impact of COVID-19 has on our business, but uncertainty remains high, and we do not consider the crisis as over. We monitor the development closely in all relevant markets and across our supply chain and are prepared to take further actions should developments worsen again. We have assessed the key risks to our business and to our financial performance as demonstrated in the slide to the left and with level of impact on the scale from high to low. The biggest risk is disruption in global retail, either in the form of retail closure which affects all businesses except for Cigars International or in the form of down trading or lower consumption.Supply chain disruptions also constitute a high risk with potential inventory shortages across the value chain as a result, and so our factory shutdowns should be persistent over a longer period of time. In case of temporary production shutdown, the impact is estimated to be limited, but our recent experience also shows that in most cases, it can be difficult to bring productivity and throughput back to normal due to social distancing and hygiene rules. We have seen this play out already in markets like Sri Lanka, Honduras, the Dominican Republic, where we've seen full or partial close-downs for some weeks; though, they are all up and running again.Restocking our materials from third-party suppliers is also a risk, but so far, we have seen a very limited impact from this. Mitigating actions has already been implemented in the areas where we have been affected, and we are building on these learnings should the situation worsen further. And as general mitigating actions, we are building some reserve inventory where we can. We are closely monitoring debtors, and we are reducing cost and postponing spending and CapEx where it makes sense. Should the situation worsen, we will look to the same sources for further mitigation. However, we continue to believe that the COVID-19 will not have a long-term material impact to our industry.Please turn to Page #7. On April 23, we communicated to the market the financial implications of the acquisition of Agio Cigars. With the combined strength of Agio and Scandinavian Tobacco Group, we aim to create an even stronger Scandinavian Tobacco Group, One STG. We strive to do so as quickly as possible by making a full integration of Agio Cigars into Scandinavian Tobacco Group. As part of our ongoing transformation, we decided to use this opportunity to also change the organizational structure from 4 to 3 commercial divisions, and we expect to deliver substantial costs as well as commercial synergies through the Agio transaction.We expect to deliver approximately DKK 225 million in cost synergies by the end of 2022, within sales and marketing, production and back-office functions. 3 factories will be closed: Moca in the Dominican Republic, Eersel and Duizel in Holland, 2 of these 3 factories are STG factories and 1 is an Agio factory. About 800 people will be terminated, explaining the majority of the expected special costs of a total of DKK 450 million. To this amount, we will also take a noncash impairment charge on the 3 factories in total of DKK 109 million. The latter amount having already been expensed in the first quarter results. When full integration has been finalized, we expect to have improved the group EBITDA margin by more than 2 percentage points compared with the ST Group level in 2019.Now please move to Slide #8. On this slide, you can see a little more details on the 3 new divisions. The decision to create 3 divisions is driven by commercial considerations while also having a clear cost component. Our new operating model is, as intended, bringing us closer to consumers and facilitating faster-decision making and hence paving the way for further simplification. We are now creating 3 effective divisions that can unlock local synergies and have efficient go-to-market strategies, while taking out costs by eliminating double functions and closing office space. The 3 new divisions are going to be division Europe Branded, headed by Jurjan Klep; the division North America Branded and Rest of the World, headed by Régis Broersma; and division North America Online & Retail, headed by Sarah Santos. As it can be seen, we create 3 almost equal sized divisions measured by net sales, and we will begin to report in line with the new structure by the second quarter of this year. We will deliver historical data to the market a couple of weeks before the Q2 announcement on 28 August.So please move to Slide #9. For the division North America Online & Retail, the organic growth in net sales was close to 0 for the quarter. The beginning of the year saw continued high promotional spend and limited margin enhancement. But we've seen a marked improvement in online demand since mid-March, and this has also eased the pressure on margins. Until COVID-19 closed our retail stores in Pennsylvania and Texas, the retail segment delivered increasing volumes.Gross profit was DKK 188 million versus DKK 182 million last year, with the increase being driven by the exchange rate developments. The gross margin was basically unchanged at 36.7%. The EBITDA margin before special items improved by 4.4 percentage points from 10.1% to 14.5%. With the gross margin development basically unchanged, flat versus last year, the expansion of the EBITDA margin is fully attributable to an improved OpEx ratio driven by efficiency improvement and lower salaries following the integration of Thompson Cigar that was completed by the end of 2019.Since the outbreak of COVID-19 and with the physical retail closing down, the online traffic has, as mentioned, increased significantly. This can best be illustrated by the fact that the division delivered 6% organic growth for the 4 months, including April, and despite the loss of volumes from our retail stores. The major concern for us during this dramatic change, our purchasing behavior has been the risk of disruptions to our processing of orders in our warehouse. However, as we speak, no such disruptions have happened, and we have been able to deliver to our customers with only marginally longer delivery times than usual.Please turn to Slide #10. For the division, North America Branded, the organic growth in net sales was 3% for the quarter. The acquisition of Agio delivered 3% growth to the reported net sales. All the main product categories, handmade cigars, machine-made cigars in Canada and smoking tobacco experienced positive organic net sales growth before COVID-19, which changed the developments quite dramatically. Already during March, the closure of retail stores across the region started to impact volumes negatively, reducing the growth for the quarter. The increase from online distributors, other than our own, have not been able to offset the impact on physical trade.For the period January to April, the organic net sales growth was negative by 4% compared with a plus 3% for the first 3 months. Now April weighs relatively more as volumes of handmade cigars seasonally is relatively low in the first month of the year, but the impact of COVID-19 has been severe. Also, machine-made cigars in Canada has experienced substantial drop in volumes since the outbreak due to retail stores being closed.For the first quarter, gross profit increased by 11% to DKK 164 million. The increase was driven by the increase in net sales and an improvement of the gross margin from 57.4% to 58.6% and the margin improvement was driven by product mix and price increases. The EBITDA margin before special items improved by 3.5 percentage points from 17.7% to 21.2%. 1.2 percentage points of the improvement was driven by the gross margin and the remaining 2.3 percentage points was driven by efficiency improvements following Fuelling the Growth as well as other cost initiatives following the decline in sales volumes compared to last year.With this, now turn to Slide #11. For Region Machine-Made Cigars, the organic growth in net sales was 5.2% for the quarter. The acquisition of Agio delivered 47% growth to the reported net sales, resulting in a 52% increase in total net sales. The overall market for machine-made cigars declined by an estimated 3.5%, which was somewhat more than in previous quarters, an increase of the excise tax in France from March 1 and the negative impacts from border closures and restrictions following COVID-19 are the other explanations. However, we have performed well with France, the U.K. and Spain delivering positive volume growth and general price and mix improvements in most markets, contributing a 5% organic net sales growth for the quarter. However, as mentioned earlier, part of this performance is driven by phasing and hoarding in certain markets.In the appendix, we have, as usual, included the market share index for our top 5 European machine-made cigar markets. The acquisition of Agio Cigars has significantly improved our combined position in France, U.K., Spain, Holland and Belgium, from around 31% to now 46.5%. This is, of course, very important for machine-made cigars long term.For the period January to April, the organic net sales growth turned to 0% compared to the 5% plus for the first 3 months. Part of that performance in April is the adverse impact of the phasing impact that I mentioned for the first quarter and part is the impact from COVID-19. With many restrictions introduced in many countries, consumption of outdoor smoking in relation to social activities have declined, although our sales team prevented from being on the road have expanded sales and marketing substantially, and we believe, with good results.For the first quarter, gross profit increased by 32% to DKK 233 million. The increase was driven by the acquisition of Agio. The gross margin declined from 50.9% to 44.0%, but the margin decline was driven by a fair value adjustment of Agio inventories. Underlying margin, excluding this adjustment, improved to 51.4%.The EBITDA margin before special items declined by 5 percentage points from 18.3% to 13.3%, but this was entirely driven by the fair value adjustment to Agio inventories. With the gross margin declining by 6.9%, the underlying OpEx ratio improved versus last year, and the improvement was driven partly by Fuelling the Growth and partly by timing of sales and marketing expenses.So please turn to Slide #12. For the Region Smoking Tobacco & Accessories, the organic growth in net sales was 12% for the quarter. Exchange rates had a 1% negative impact. And with the acquisition of Agio and the divestment of sales companies in Slovenia and Croatia, delivering 18% growth, with total reported net sales was plus 29%. The organic growth was driven by good growth in fine-cut but also by phasing ahead of an excise tax increase in Denmark. By the end of the quarter, the COVID-19 outbreak reduced and even completely stopped certain sales channels by the Danish/German border.For the period January to April, the organic net sales growth was reduced to an increase of 6% compared with the 12% for the first 3 months. Part of the performance in April is again explained by the adverse impact of the phasing that I just mentioned for the first quarter and part is the impact from COVID-19. For the first quarter, gross profit increased by 32% to DKK 234 million, the increase was driven by the acquisition of Agio. The gross margin increased slightly from 49.1% to 50.0%, and the margin increase was driven by product mix, by especially good growth in the high-margin category fine-cut tobacco contributed positively.The EBITDA margin before special items improved by 3.1 percentage points from 27.9% to 31%. And 0.9 percentage points of the improvement was driven by the gross margin and the remaining 2.2 percentage points was driven partly by efficiency improvements following Fuelling the Growth and partly by timing of sales and marketing expenses.With this, please turn to Slide #13, and I'll now hand over to Marianne.

[Marianne Rørslev Bock, Executive VP & CFO]

Thank you, Niels. For the first quarter of 2020, we delivered a total net sales of DKK 1.8 billion, a gross profit before special items of DKK 819 million, an EBITDA before special items of DKK 326 million and a net profit of DKK 21 million. Our free cash flow before acquisitions was DKK 122 million. All numbers are impacted by Agio Cigars, which was acquired in the beginning of the quarter.Net sales increased by 22% to DKK 1.791 billion, 16% of the increase was driven by the acquisition of Agio Cigars and the divestment of the sales companies in Slovenia and Croatia. Exchange rate development delivered another 1% and organic net sales growth, the remaining 5%.The organic development was driven by strong growth in Region Smoking Tobacco was 12%, Region Machine-Made Cigars was 5%, North America Branded was 3%, and finally, North America Online & Retail was a modest 0.2% increase. However, it is important to emphasize that the phasing of shipments ahead of excise increases, for instance in Denmark, as well as hoarding of products ahead of the imposed restrictions following COVID-19, significantly contributed to the 5% organic growth. Excluding this impact, we estimate the underlying organic growth in net sales was slightly positive.Gross profit before special items increased by 20% for the first quarter to DKK 819 million. The gross margin was 45.8% compared to 46.8% last year. All 4 divisions delivered an increase in gross profit, with particularly high-growth in Region Machine-Made Cigars and Region Smoking Tobacco. These 2 divisions were the most impacted by the acquisition of Agio, whereas North America Branded only was marginally impacted by the acquisition.The gross margin was stable or improving in 3 of the 4 divisions. The exception was Region Machine-Made Cigars, where the inclusion of operations from Agio Cigars with the mentioned fair value adjustment of inventories resulted in adverse margin impact.EBITDA before special items increased by 36% to DKK 326 million driven by the gross profit development, but also by continued strong focus in keeping the OpEx ratio down. The EBITDA margin was 18.2% compared with 16.3% in the first quarter of last year, and the organic growth in EBITDA was, as mentioned earlier, 23.9%. Excluding the impact of phasing and hoarding, it is our estimate that organic EBITDA growth was mid-single digit.Net profit decreased by DKK 72 million to DKK 22 million. The positive operational performance was more than offset by an increase in special costs to DKK 155 million compared with DKK 24 million in the first quarter of 2019. The special cost in this quarter contained a DKK 109 million impairment charge in relation to the closure of factories as well as a total of DKK 46 million of integration costs in relation to Agio Cigars, cost for the closure of our Tucker factory announced last September and Fuelling the Growth. The split between the different sources of special items can be found in the company announcement.Adjusted earnings per share based on the net profit, excluding special costs, increased from DKK 1.10 per share to DKK 1.4 per share. The free cash flow before acquisition was DKK 122 million versus DKK 72 million in the first quarter of 2019, mainly driven by improved operating performance.Working capital delivered an DKK 18 million negative contribution to the cash flow. Usually, working capital contributes with cash flow outflows in the beginning of the year, primarily due to season in tobacco delivered.Now please turn to Slide 14. I'll now give an update on the development in the net interest-bearing debt and the leverage ratio, which naturally have been impacted due to the DKK 1.5 billion investment in Agio Cigars. By the end of the first quarter of 2020, the net interest-bearing debt versus -- was DKK 4.444 billion, an increase of DKK 2.114 billion versus the end of 2019. The development is driven by: one, the payment of DKK 1.5 billion for Agio Cigars; two, the payout of dividends by the end of March; and thirdly, by the underlying cash flow from operations, which normally is relatively modest in the first quarter of the year.The leverage ratio, defined as the net interest-bearing debt over 12 months rolling EBITDA before special items, was 2.8x at the end of March 2020 compared to our target ratio of 2.5x. The impact from the acquisition of Royal Agio Cigars, in combination with the timing of the dividend payment, explains this temporary increase in the leverage. We expect to be below 2.5x target well before the end of the year.On the Annual General Meeting held 26th -- March 26, the shareholders approved the DKK 6.10 ordinary dividend per share. As announced in relation to the full year 2019 release in February, a decision has been taken to initiate a share buyback program in 2020 of up to DKK 300 million. This decision is unchanged.Now please turn to Slide #15. On March 19, 2020, we suspended the guidance for the full year due to the low visibility following the outbreak of COVID-19. Today, we have released an updated financial guidance for the year. Based on the financial performance in the first quarter and improved visibility into the second quarter as the implications of COVID-19 has become more clear, supported by the year-to-date performance we have disclosed to April and with the integration plan of our Agio Cigars having been completed, the conditions for releasing an updated guidance have improved. However, it must be stressed that basic assumptions behind the new guidance remain more uncertain than normal. The financial guidance includes the financial impact from the acquisition of Agio Cigars. This was not the case with the guidance we suspended back in March.The new guidance is: organic EBITDA growth above 2%, free cash flow before acquisitions in the level of DKK 850 million. The guidance is based on assumptions of a moderate decline in organic net sales growth for the full year, with the highest decline in organic net sales growth in the second quarter and a normalization over the remaining course of the year as markets reopen. We expect no material disruption to our supply chain, and we expect a contribution from cost savings in relation to the integration of Agio Cigars of about DKK 70 million to DKK 80 million in 2020 as well as further benefits from our Fuelling the Growth program.With this, I will leave the word back to the operator, and we are now ready to take any questions you might have.

[Operator]

[Operator Instructions] And we have questions that came through ma'am. We will now take our first question. And this comes from the line of Niklas Ekman.

[Niklas Ekman]

Just a couple of questions, if I may. Firstly, I'm curious about the last thing you said here about the organic sales outlook or assumptions. You had positive organic sales growth, both in Q1 and year-to-date year to April. So why are you assuming that will decline going forward? What are the main things you're worried about?

[Niels Frederiksen, CEO, President & Member of Executive Board]

I think that the way to think about this, Niklas, is that we have different moving parts. And I, myself, think about it in really 3 buckets. We have an online business for handmade cigars in the U.S. that is seeing solid growth, but also growth delivered or supported by retail closures. Then we have some businesses like the border trade, the global travel retail duty-free that has more or less come to a full stop. And then we have the remaining, let's call it, mass market business which is negatively affected, but with a lot of uncertainty. So when we look at the full year, we think that the impact in the second quarter will be the highest, and it will hit actually all businesses, except for the online. And then we can see as stores are beginning to open, it also normalizing, but we continue to believe that there will be uncertainty over the full year, and we think it's prudent to project the net sales impact for the full year to be slightly negative.

[Marianne Rørslev Bock, Executive VP & CFO]

And I think it's also -- also remember that the impact of COVID-19, it didn't really hit us until mid-March and ongoing for the first quarter.

[Niklas Ekman]

That's very clear. And in general, what can you say about the impact of COVID-19 on consumption? What -- you've alluded to this a couple of times here on the call. But in general, do you have any tangible data indicating what consumption -- how consumption has changed due to COVID-19?

[Niels Frederiksen, CEO, President & Member of Executive Board]

I think that our base hypothesis and what we are putting into the assumption is that consumption has been down over the past couple of months and will probably be down over the coming period as we -- as the markets attempt to reopen. We don't think that this is a permanent, let's say, decline in consumption. We think it is the result of lockdowns and changes to people's everyday life and, let's say, consumption pattern. When -- could there be some rebalancing of inventory taking place when retailers open up and normalize? Yes, theoretically, but we have no clear evidence of it, and we are not putting it into our assumptions.

[Niklas Ekman]

Excellent. And also a question on buybacks. You reiterated now the ambition to buy back shares about DKK 300 million. Can you give any indication of when you expect to launch such a buyback program?

[Marianne Rørslev Bock, Executive VP & CFO]

What I can say on the share buyback, when we are launching the -- or coming out with a new guidance here, that is based on a certain set of assumptions. And we are also saying that those assumptions are more uncertain than normally, but where -- we're seeing a more significant impact in the Q2. So we have decided that we want to see Q2, how Q2 pans out, and one of that is really following the assumptions that we have before we start off the share buyback.

[Operator]

And your next question comes from the line of [ Magnus Jensen ].

[Unknown Analyst]

First, Niels, it sounds like you just said that you already had seen some improvement from April into May. Can you confirm that?

[Niels Frederiksen, CEO, President & Member of Executive Board]

I think that what we are following, [ Magnus ], is on a weekly basis, what's happening in the countries that are beginning to reopen. And yes, we can see some normalization, but I think it's -- again, it's too early. I think that the level of certainty has gone up, but it's certainly not transparent yet. And we do not consider, let's say, the crisis over, and we continue to monitor these developments very closely on a weekly basis. So I think it's -- I think the best way of expressing is there are small signs of improvement but not yet a high level of certainty.

[Unknown Analyst]

Okay. Very clear. Then a question to Agio. I mean I guess you're now some 5 months into the integration of Agio. Is there anything that has surprised you positively or negatively about the acquisition, now if you've had it under your hands for quite some time?

[Niels Frederiksen, CEO, President & Member of Executive Board]

I think the Agio business is and was a business very similar to ours just of a smaller size. And as such, we have not run into any surprises, and the transaction was also done in a way that were no real motivation for the sellers to load the markets and stuff like that. So the Agio business is -- how can you say, in the same shape that we anticipated. I think that when it comes to integration, and this is not really for Agio alone, but when you go from announcing to implementing, there is a period of uncertainty, and we are in that right now where we negotiate with works councils on the exact execution. I think that's normal, and it's not a surprise to us. But this is what we are working on right now. And when we get to the second quarter, we'll be even wiser on that as well.

[Marianne Rørslev Bock, Executive VP & CFO]

So maybe a comment from my side on the soft side. I think what we have seen and what actually surprised me is that we have announced the integration end of April and having lots of conversations with people virtually. So we started off the integration, huge integration, virtually simply to give more clarity to people, and that has gone really well compared to the situation.

[Unknown Analyst]

Good to hear. Just one more question from my side. In terms of the market share on machine-made cigars in Europe, it's clear that, of course, it's increased a lot since you bought Agio. But can you say how this developed? If you exclude Agio from the calculations, have you been taking or losing market share? That was my last question.

[Niels Frederiksen, CEO, President & Member of Executive Board]

Yes. Thank you. I think that, as I recall the data now, it's either stable or slightly down, but we also came off a very strong Q4. But that's, as I recall it.

[Operator]

And we'll now take our next question and this comes from the line of Mathias Nielsen.

[Mathias Bjerrum Nielsen, Analyst]

Just a few questions from my side as well. So the first one is on COVID-19, you mentioned a lot of risks. And I wanted to hear if you see something on the opportunity side, also on the structural side. If you can elaborate a bit on that?

[Niels Frederiksen, CEO, President & Member of Executive Board]

Well, I think that the biggest upside we've seen on COVID-19 is our online business. And I think that the -- we already have a high penetration when it comes to consumers buying handmade cigars online in the U.S. for all sorts of good reasons, and we've seen that accelerate. So that's the positive one. I think it's good that it coincides with all the work we are doing to further professionalize our online business, which was a project we started in 2019 and launched in the beginning of 2020. But I also think that it's too early to conclude what will be the permanent impact on online. But we actually believe that this will accelerate some movement of consumers to online even on a permanent basis. Other opportunities, I don't know, I'm looking to Marianne, if she can think of something.

[Marianne Rørslev Bock, Executive VP & CFO]

No. But I think like any other company, we're, of course, looking at how this crisis has been developing and the impact on our business. And here, learnings, at least for now, is travel, like many other companies, we have been driving a global company virtually over the last 2 months, and we certainly need to take some learnings from that. We have also been driving sales out from our sales forces. You can put it this way, so did our competitors. So we have been equal. But we certainly also need to look into learnings from smaller initiatives like that.

[Mathias Bjerrum Nielsen, Analyst]

On the online business, maybe if you have to have any numbers on like what is the amount of people going back to physical retail once they have been online? Do you have any statistics on that because, I guess, like in other industries, it's like once you have been online, that's something you like that's a recurring client all the time. So how is that on your part of the business? Is that similar? Or is it that many people switch back and forth?

[Niels Frederiksen, CEO, President & Member of Executive Board]

Again, I think it's important to remember that the starting point was a very high penetration of online usage already. We have 60%, 65% of all purchases taking place online already. And we've seen an increase that was kind of slowly starting up by mid-April and then -- sorry, mid-March, accelerating into April as more and more physical retail stores closed. And now we are in a period where retailers are reopening, and we are watching carefully what will happen in the coming months. This is one of the, let's say, the difficult situations to read from a longer-term perspective. But I'll give you 1 example of what is valuable is that we get in this period a significant improvement in new customers. And these new customers are then active in our customer file and can subsequently be interacted to stimulate the development of that business. So that's a positive.

[Mathias Bjerrum Nielsen, Analyst]

On the NAB, do you have any numbers for the split between online and physical retail customers on the business-to-business side in the NAB?

[Niels Frederiksen, CEO, President & Member of Executive Board]

I don't think we disclosed the split between our sales channels. I think that the way we normally talk about the North American Branded business, when we talk about handmade, it is really 3 types of channels: there's an online channel; then there's a group of specialist retailers brick-and-mortar stores that specialize in cigars; and then there is the, let's call it, the wider distribution of products into liquor stores and other smaller retailers that also sell handmade. And it is the latter 2 that are affected, where there is also on the branded side, a positive impact from online customers other than us growing.

[Marianne Rørslev Bock, Executive VP & CFO]

So we can say that, that's within branded, the increased online sales cannot offset what we lost on the other channel.

[Mathias Bjerrum Nielsen, Analyst]

Okay. So it's -- is it like equally 1/3 in each segment? Or is it like -- how should we think about it? Or is online-only a marginal part of it?

[Niels Frederiksen, CEO, President & Member of Executive Board]

We're not disclosing the details of it, Mathias. But -- so that is what it is.

[Mathias Bjerrum Nielsen, Analyst]

Fair enough. And then my last question on regulation. It seems like the focus has moved away from tobacco in general and especially cigars, is that also what you have seen like during the past quarter since we had an update last time?

[Niels Frederiksen, CEO, President & Member of Executive Board]

Yes. So in the U.S., you can say that most of the attention continues to go into the [indiscernible] area. We believe that the secondary focus is going to be flavors. What the FDA did do is they postponed the deadline for submitting substantial equivalent applications from May to September. So -- and this was really reflecting the impact of the COVID-19 crisis and everyone requesting a delay in the deadline.

[Operator]

And we have a follow-up question and this comes from the line of Niklas Ekman.

[Niklas Ekman]

And just a couple of follow-ups. Firstly, if you could just -- if I'm understanding correctly, the earnings contribution from Agio in Q1. In the report, you mentioned, I think it was DKK 58 million in Q1 '19, right, to DKK 97 million in Q1 of '20. Have I understood that correctly that, that was the contribution to adjusted EBITDA?

[Marianne Rørslev Bock, Executive VP & CFO]

Can I get back with the precise numbers, Niklas?

[Niklas Ekman]

Okay. Yes, sure. That's fine. And secondly, if there's any reason to believe because you have a -- or Agio saw a strong earnings improvement in 2019. Do you have any reason to believe that those DKK 203 million in EBITDA generated last year would be materially higher or lower in 2020 excluding synergies?

[Marianne Rørslev Bock, Executive VP & CFO]

Yes. But I can say that in 2019, Agio was impacted positively by a compensation from some contracts delivering cuts, and that is approximately a little less than DKK 20 million. So you would not see that in 2020, and you did not see it in '18.

[Niklas Ekman]

Okay. Also on Fuelling the Growth, how much of savings would you say remains left on the table at the moment?

[Marianne Rørslev Bock, Executive VP & CFO]

So what we said coming out of 2019 was that we delivered in '19 a little more than 1/3 of the savings. And you should think of Fuelling the Growth as -- the remaining savings as a split over the coming 2 years. And we think that it's -- it's dribbling in, you can say, as we go more or less equally split on the full year.

[Niklas Ekman]

Okay. You mentioned in the results, your guidance for the full year, you talked about financial expenses of DKK 90 million. Is that your guidance for net financials or just for financial expenses? And is there any particular reasons why financial expenses were so high in Q1? Were there any FX-related impact or anything else?

[Marianne Rørslev Bock, Executive VP & CFO]

Yes. Yes. So there are several reasons for the financial cost to be high in Q1. One thing is, as you say, exchange losses, where in Q1 '19, we had only exchange gains. But then also, we refinanced all our funding. So upfront fees that we normally capitalize and depreciate over the time of the majority of the loans, we have expensed those in Q1 as we refinance and then there's also been a valuation of some euro swaps that we had on the equity that we have now put into the P&L. But the main part are exchange losses and upfront fees being expensed.

[Niklas Ekman]

Okay. And DKK 90 million, that is the guidance for the net financials, so both net financial income and financial expenses? Excellent.

[Marianne Rørslev Bock, Executive VP & CFO]

Yes. And I actually do have some numbers for you for Agio in '19 and in -- was it '19 numbers you were looking for?

[Niklas Ekman]

I was wondering, if I look -- when I look at your EBITDA table, and this is on Page 12 in the results statement, you talk about DKK 58 million from acquisitions in '19 and then DKK 39 million in '20. And I assume that DKK 58 million refers to what Agio made in 2019 Q1 and DKK 39 million is the earnings improvement in 2020. But I'm not sure if I understood that correctly.

[Niels Frederiksen, CEO, President & Member of Executive Board]

The DKK 39 million is the value -- fair value adjustment on the inventory side in Agio. So it's not earnings related as such.

[Niklas Ekman]

Okay. And then the DKK 58 million is basically what Agio made in Q1 of last year or what it made in Q1 of this year?

[Marianne Rørslev Bock, Executive VP & CFO]

Last year.

[Operator]

No further questions that came through. Please continue.

[Niels Frederiksen, CEO, President & Member of Executive Board]

Okay. Well, if there's no further questions, I think we'll thank you for participating and wish you all a good day. Thank you.

[Operator]

Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.