Scandinavian Tobacco Group (STG) has announced its financial earnings for the second quarter and as expected the results aren’t great.
The parent company of General Cigar Co. and Cigars International reported an EBITDA of DKK 315 million ($49.96 million) on revenues of DKK 1.673 billion ($265.3 million), however those numbers represent declines of 3.8 percent and 1.1 percent respectively compared to Q2 2016.
Combined, the first two quarters show the company is 5 percent down in revenue and 11.8 percent down in EBITDA compared to the first six months of last year.
It’s in large part due to STG’s other premium cigar division, Cigars International, the world’s largest cigar retailer.
Earlier this year, STG was forced to downgrade its financial guidance due to problems with Cigars International’s upgrade of its IT infrastructure, namely its enterprise resource planning (ERP) and warehouse management system.
Shortly after implementing the update, orders placed at Cigars International were not being fulfilled due to errors in the system. The company’s customer service operation was also affected, only compounding the issue.
That upgrade took place in February, and while it appears the major parts of the issues have been fixed, sources told halfwheel last month minor issues still remained.
STG’s earnings report also indicates that profits were affected not only by the issues themselves, but also by promotions designed to win back customers:
Cigars International’s performance in the second quarter was still affected by the operational constraints resulting from the implementation of new IT infrastructure and ERP and warehouse management systems in the first quarter. Our focus in the second quarter was to resolve the issues related to the IT system and our customer service and inventory management in order to restore our ability to meet customer demand and run the necessary level of targeted campaigns and promotional activities to win back lost customers and recover net sales. We see steady but slow progress and recovery in this respect and we continue our efforts to remedy the situation.
STG’s branded cigar business, i.e. the General Cigar Co. portfolio, showed “positive growth in all channels” for both Q2 and the first six months, though STG declined to specify percentages.
Overall, the handmade cigar division generated DKK 519 million ($82.3 million) in revenue for the quarter and DKK 920 million ($145.9 million) for the first six months.
“Our overall financial performance in the second quarter was in line with our expectations. We are seeing an improved trajectory for machine-made cigars in Europe supported by more stable market dynamics,” said Niels Frederiksen, ceo of STG, in the earnings statement.
“Our branded handmade cigars business is performing well, but the category remains impacted by the challenges in Cigars International. We are making steady but slow progress in our efforts to remedy the situation. Our cash generation remains strong, and we delivered a free cash flow of DKK 251 million in the quarter.”
STG noted that experienced higher costs as part of the compliance costs for the European Union Tobacco Products Directive (TPD2), but was optimistic that a recent decision from the Conseil d’État, a French administrative court, meant that there would be no changes to its Café Crème cigarillo business in France, something that accounts for 4 percent of the company’s total revenues.
The company said no further adjustment was needed for its 2017 guidance.
STG is traded on the NASDAQ Copenhagen