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SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
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SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
ne.
1404044EogSN71186
ABOUT SCANDINAVIAN
TOBACCO GROUP
Our Group is all about creating mo-
ments of great enjoyment for smokers.
RÅ We take pride in our fantastic interna-
N tional brands and successful regional
brands, all developed, refined and in-
novated by talented people who are passionate
Flor Tre
Today, Scandinavian Tobacco Group is the world's
largest manufacturer of cigars and pipe tobacco.
We alsø hold a strong position in the fine-cut to-
bacco category in the Scandinavian, US and other
markets.
OASE AE] SNEG
The Group employs 9,200 people in the Domini-
can Republic, Honduras, Nicaragua, Indonesia, Eu-
rope, New Zealand, Australia, Canada and the US.
We have 18 sales offices in North America, Europe,
New Zealand and Australia, and we have sales to
more than 100 countries around the world.
In the US, we have market-leading positions in
handmade cigars and catalogue and internet
sales through our ownership of General Cigar and
Cigars International.
OUR USHER SENDE
Our portfolio contains more than 200 leading
brands, including the cigar brands Café Créme, La
Paz, Henri Wintermans, Macanudo, CAO, Partagas
(US) and Cohiba (US). Pipe tobacco brands indude
Captain Black, Erinmore, Borkum Riff and W.Ø.
Larsen, while our leading fine-cut tobacco brands
include Crossroad, Bugler, Break, Escort, Bati Shag
and Tiedemanns.
KEE ARE Te au] rn
Scandinavian Tobacco Group is led by an interna-
tional management team and has its head office
in Denmark.
The Group is 51% owned by the Danish company
Skandinavisk Holding A/S and 49% by Swedish
Match. Skandinavisk Holding A/S is ultimately
arrene DE ere tre era ITS
nus Foundation and Det Obelske Familiefond,
which have been active in the tobacco industry
for more than 250 years. Swedish Match is a pub-
lidy owned company listed on the Stockholm
Stock Exchange.
BESES NNE
THE GROUP
IN SHORT
WORLD'S
LÅRGEST
MANUFACTURER OF CIGARS
AND PIPE TOBACCO
NO. 1 POSITIONS
M inthe US market for handmade cigars
= in the European market for machine-made cigars
M in the global market for pipe tobacco
H= in the US and Nordic markets for fine cut
9,200
TALENTED AND CURIOUS
EMPLOYEES WORLDWIDE
200
GLOBAL AND Ø
LOCAL TOBACCO WINTERMANS
BRANDS
COHIBA
1404044EogSN71187
Sd
VISION
To be a dynamicand innovative tobacco
company with growing leadership in
cigars and pipe tobacco and a significant
position in fine cut.
g
då
rl
€
ø
22
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/3
& 12 PRODUCTION SITES IN 8 COUNTRIES
IE 13 SALES COMPANIES IN 16 COUNTRIES
SALES TO MORE THAN 100 COUNTRIES
MISSION
With great brands and talented and curious
people we give smokers the best smoking
enjøyment and thereby secure continuous
growth in turnover and profit.
OWMERSHIP
51% sm»
SKANDINAVISK
HOLDINGA/ST
ET og
49%
DÅ
SWEDISH MATCH"
2010
MERGER BETWEEN SCANDINAVIAN TOBACCO
GROUP AND THE MAIN PART OF SWEDISH
MATCH'S CIGAR AND PIPE TOBACCO BUSINESS
1404044EogSN71188
same nen uk men sinke 3
e … i
mer did
(gg Ear de
any
IT'S ABOUT
PEOPLE
Qur business is about people. it's about individuals
who enjoy cigars, get pleasure from smoking a pipe
or from rolling their own cigarettes. They all have
different motivations. Some smoketo achieve inner
peace, others to make a good evening with friends
even better. Some like a smooth smoke, others pre-
fer it full-body.
Qur business is also about 9,200 people across four
continents who use their talentand curiosity to give
others the best possible smoking experience. We
have therefore set out to lead in cigars, pipe to-
bacco and fine cut in all the markets where our
brands are present.
Leading is not an easy task. But we have developed
a unique portfolio of more than 200 brands, includ-
ing truly iconic ones such as Café Cråme and Maca-
nudoø that are benchmark brands in the machine-
made and handmade cigar categories, respectively.
We aim to keep all our brands vibrant, making
them contemporary and relevant to consumers.
Then there is what we see as our special task and
big opportunity: to innovate and develop pro-
ducts that attract smokers fram other tobacco
categories. This is a constant focus for everybody
in our company.
While paving the way to future market opportuni-
ties, we also take care of our day-to-day business, In
2013, total markets declined significantly in volume
terms, not least our core markets. Despite this, we
managed to keep net sales flat with a growth rate
of 0,5% in local currencies.
We had hoped for more, however. We therefore
reviewed our 'Route 2016' strategy to ensure that
we continue to grow our net sales and support our
ambition to deliver improved earnings. The review
confirmed our strategy with a few adjustments.
We will continue to focus on growth in markets
where our share is low and total market volumes
are high. And we will continue our efforts to be at
the forefront wherever there are growing opportu-
nities within our categories. In 2013, we delivered
growth in all regions except for our core markets in
Western and Northern Europe. And we grew in all
categories except for machine-made cigars. Little
cigars and fine cut delivered double-digit growth
rates; pipe tobacco and our catalogue and internet
sales in the US delivered high growth rates as well.
Overall, we have improved our market position and
share of markets and categories since the launch of
our strategy in 2011.
lt is an important part of our strategy that we con-
tinue to invest in our future. The transformation of
our supply chain has been a gigantic task demand-
ing extraordinary efforts across our organisation.
Closing down two machine-made cigars factories
Our business is also
about 9,200 people
Jcross four continents
who use their talent
and curiosity ta give
others the best
possible smoking
experience,
1404044FogSN71189
while re-building the remaining four and imple-
menting a new ERP system is not an easy task.
However, I want to remind us all that this project
is making us a stronger company. We can take pride
in completing it ahead of schedule.
We have made another big investment in consumer
insights. We are committed to delivering a first-dass
smoking experience to anyone who enjoys our ci-
gars and pipe tobacco or rolls his own cigarettes.
And we are dedicated to innovation, in particular
to developing new products that attract smokers
from other categories. Our innovation and product
development teams are leveraging these consumer
insights.
Meanwhile, we want to pay tribute to smokers
throughout this annual report. They come from
different countries, each with their own story, their
own experiences and their own dreams. But there
are afewthingsthatthey share: they enjoytobacco,
and they are ready to share their stories with us.
Throughout our Annual Report 2013 you will meet
Lars, Lillan, Ole, Cesar, Joséphine and Conny. They
are people to whom we want to givethe bestsmok-
ing enjoyment. They are some of the people that
our business is all about.
odds
Anders Colding Friis
CEO
8/7 SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
FINANGIAL FAGTS
OF THE GROUP
FiNANC AL PERFORMANCE
REPORTED
IN MDKK
= 5995
EBITDA
NET SALES
MDKK
6,500
5,200
3,900
2,600
1,300
2011
23%
HANDMADE
CIGARS
GROWTH
2012-2013
0.9%
a Ta
i
DA era NAS
(fl !
Di Å i;
[17]
2 4
i
|
men
i]
; |
FE
2012 2013
42%
MADE
CIGARS
ADJUSTED FOR
CURRENCY
940
ADJUSTED FOR
ONE-OFF ITEMS
1.1%
EBITDA MARGIN
19.8%
CASH FLOW FROM
OPERATING ACTIVITIES
142
MDKK
EBITDA CASH FLOW FROM OPERATING ACTIVITIES
NDKK MDKK
1,400 900
0. 750 pm
1,120 ; 1 | 1
11 oo |
840 i i i i
i i 450 i i
560 i i i '
i ' 300 i i
280 ; ! 150 ; |
i i i H
0 fo seemed 0 henen un me
2011 2012 2013 2011 2012 2013
Share Growth CAGR
2013 2013" 2011-2013"
i
! North America 37.9% 22% 5.3%
1 0 % Northern Europe 148% -2.6% -1.5%
PIPE 1 6% Western Europe 22.9% -13.3% -3.6%
TOBACCO 0 Southern Europe 6.3% 5.5% 0.9%
9 0% OTHER Soceania 71.0% 272% 175%
0 Rest of the World 111% 127% 9.4%
FINE-CUT Total 100.0% 0.5% 2.9%
TOBACCO
" Adj, for currencies
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /9
GROUP FINANCIAL HIGHLIGHTS AND KEY RATIOS
DKK million 2013 2012 2011 2010"
INCOME STATEMENT
Net sales 5,925 5,978 5,472 1,355
Gross profit 2,915 2,992 2,780 576
EBITDA 1,175 1,301 1,174 -46
EBITA 1,046 1,176 1,035 -83
EBIT . ' 715 931 825 -183
Net financial items (exd. share of profit of associated company) -104 -101 -47 -5
Profit before tax 676 843 782 -188
Income taxes . -103 -224 -204 ål
Net profit 573 618 578 -147
STATEMENT OF COMPREHENSIVE INCOME
Other comprehensive income -253 -118 118 94
Total comprehensive income 320 501 696 -53
BALANCE SHEET
Intangible assets 7,379 7,792 7,802 6,964
Property, plant and equipment 1,112 991 990 950
Other non-current assets 181 194 206 103
Inventories 2,927 2,781 2,660 2,413
Receivables 1,133 1,293 1,144 1,247
Total assets 13,196 13,736 13,753 12,106
Equity 8,333 8,425 8,274 7,578
Net interest-bearing debt (NIBD) 2,808 2,908 2,741 2,380
Investment in property, plant and equipment 271 138 124 93
CASH FLOW STATEMENT
Cash flow from operating activities 742 716 860 90
Cash flow from investing activities -315 -388 1,152 -95
Cash flow from financing activities 647 -596 815 38
Cash and cash equivalents end of period 464 684 952 429
KEY RATIOS
Gross margin 49.2% 50.0% 50.8% 42.5%
EBITDA margin 19.3% 21.8% 21.5% -3.4%
NIBD/EBITDA 2.4 2.2 23 n/a
NIBD/EBITA 27 2.5 2.6 n/a
EBIT margin . 13.1% 15.6% 15.1% -13.5%
Tax percentage 15.2% 26.6% 26.1% 21.7%
Return on assets 5.9% 68% 6.0% -6.0%
Equity ratio 63.1% 61.3% 60.2% 62.6%
Return on equity 6.8% 7.4% 73% -7.8%
> Financial highlights for 2010 cover the period 1 October — 31 December 2010 and have not been restated as part of the transition to IFRS. Fora definition of key
ratios please refer to note 5.7 on page 107.
1404044EogSN71190
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/11
FINANGIAL
HIGHLIGHTS
Scandinavian Tobacco Group is aiming at growing
its market leadership in cigars and pipe tobacco
and at growing its business outside its core mar-
kets in Northern and Western Europe. We are also
pursuing growth opportunities for fine-cuttobacco
in selected geographies.
Our growth strategy builds on ensuring strong
brands, product innovation and excellence both
in sales and in our supply chain. In 2013, we grew
our strategic brands, progressed towards delivering
genuine break-through innovation and launched
more than 250 new products and brand initiatives.
We also advanced ahead of schedule on the 6-2-4
project, which is changing our production footprint
in machine-made cigars and securing cost-leader-
ship in our supply chain.
In a tough year, we successfully grew net sales in lo-
cal currencies in all categories except for machine-
made cigars. We also secured growth in all geog-
raphies outside Northern and Western Europe. In
total, our net sales ended the year on a par with
2012 when adjusted for currency impact.
INCOME STATEMENT
Reported net sales for 2013 totalled DKK 5,925
million (DKK 5,978 million in 2012). In local curren-
cies, netsales were largely the same as last year (up
0.5%). Adjusted for agreed one-off stock reductions
at our distributor in France, net sales grew by 1.7%.
This growth was driven by price increases in all cat-
egories and higher volumes of pipe tobacco and
fine-cut tobacco. This volume growth was partly
1404044EogSN71191
offset by negative mix effects in the machine-made
cigars category, where low-margin produdts grow
faster than high-margin machine-made cigars.
The Group's gross profit margin of 49.2% for 2013
is largely unchanged from last year (50.0%).
Reported operating costs increased by 3% to DKK
1,740 million (DKK 1,690 million). In local curren-
cies, and adjusted for one-off severance costs, op-
erating costs grew by 4%. This was mainly due to
inflation and increased sales activities in selected
countries.
Reported EBITDA amounted to DKK 1,175 million,
10% below 2012 (DKK 1,301 million). In local cur-
rencies, and adjusted for severance costs and the
stock reduction in France, EBITDA declined by 3%.
This was mainly due to a lower contribution margin
driven by negative mix effects and higher operating
costs resulting from inflation.
Depreciation and impairment totalled DKK 129
million, largely in line with last year (DKK 125 mil-
lion). Amortisation and impairment amounted
to DKK 271 million. This was an increase of 11%,
driven by the full-year impact of the buy-back of
distribution rights in Australia and the acquisi-
tions of software and various trademarks during
the year.
Net financial items came to a cost of DKK 104 mil-
lion, a 4% increase that was due to exchange losses
in 2013 resulting from decreasing exchange rates
compared to DKK; these were partly offset by lower
interest costs.
The tax rate for the year stood at 15%, compared
to 27% in 2012. This was significantly impacted by
newly enacted tax rates in Denmark and Sweden.
Our net profit for the year totalled DKK 573 million,
7% below 2012 (DKK 618 million).
The Group's other comprehensive income
amounted to minus DKK 253 million; this was
mainly due to exchange rate adjustments during
the year on our foreign investments.
The overall financial performance in local cur-
rencies, adjusted for major one-off items, was
below expectations for the year. This was mainly
caused by a negative mix in the machine-made
cigar category and lower fine-cut volumes than
anticipated.
BALANCE SHEET
Goodwill and trademarks represented a value of
DKK 7,008 million (DKK 7,379 million), equal to 53%
of the Group's total assets (54%). This dedline in
value since 2012 was mainly caused by the amor-
tisation oftrademarks and the lower USD exchange
rate, which resulted in a decline in the value of
goodwill and trademarks relating to our US activi-
ties.
The Group's other intangible assets mainly com-
prised software and distribution rights. During
2013, we invested DKK 48 million in intangibles,
12 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
MET SAD ENEDES AT ETLORGE 16%
0
& HANDMADE CIGARS
0. MACHINE-MADE CIGARS 9% . ENN
PIPE TOBACCO
".. FINE-CUT TOBACCO 10%
OD OTHER
mainly software and the acquisition of Pipesand-
Cigars.com to our US internet and catalogue busi-
ness Cigars International.
Tangible assets primarily related to our produc-
tion facilities around the world. During 2013, we
invested DKK 271 million (DKK 138 million) in as-
sets, including new warehouses in Belgium and
Denmark, a new fine-cut factory in Holstebro, which
is expected to be ready for use in late 2014,and the
renewal of production facilities.
Our DKK 98 million (DKK 105 million) investment
in associated companies related to our 20% own-
ership of Caribbean Cigar Holdings Group Co. S.A.
The Group's inventories amounted to DKK 2,927
million in 2013, a 5% increase from 2012's DKK
2,781 million. The increase is driven by the higher
activity at Cigars International, increased levels of
finished goods and higher stock in hand of tax and
excise stamps.
Equity totalled DKK 8,333 million (DKK 8,425 mil-
lion), equivalent to 63% of the total balance sheet
(61%). The movement in the year was made up of
total comprehensive income intheyear of DKK 320
million, minus a dividend paid of DKK 412 million.
Liabilities amounted to DKK 4,906 million at 31 De-
cember 2013 (DKK 5,311 million). The Group repaid
part of an external US Dollar loan during the year.
In addition some of the deferred tax liabilities be-
came due during the year.
TT
23%
DEVELOPMENT
BY CATEGORY
We always intend to innovate and grow in all our
categories. We achieved this in the handmade
cigar and pipe tobacco categories despite dedin-
ing total markets. We also achieved our highest
growth rates in the fine-cut category, where the
total market is growing. It was only in machine-
made cigars that our net sales showed some de-
cline in local currencies.
Our handmade cigars business is predominantly in
the US where two out of three handmade cigars
are sold globally. In the category, we grew by 2.4%
in local currencies. Our US subsidiary Cigars Inter-
national led the category with double-digit growth
and increasing market shares. In fact, this internet
and catalogue retailer now ships over 20% of all
handmade cigars purchased in the US.
The growth in our handmade cigar category was
partly held back by stock reductions at a few of
General Cigar's large accounts. In Europe, the
handmade business grew most strongly in France,
Belgium, the Netherlands, Croatia and Italy, albeit
from a low basis.
The total market for machine-made cigars is
growing in the US and declining from a high basis
in Europe where we are market leader. Our net
sales declined by 2.6% in local currencies in the
machine-made cigars category. This was mainly
due to decline in total market volumes, especially
in our core markets in the UK, Belgium, the Nether-
lands and France. The latter was also affected by
reduced stock levels.
We have made an effort to grow in machine-made
cigars in the US market, and we expect this to pay
off within a few years. The category is performing
well in Australia, Ukraine and Russia with double-
digit growth rates.
We have launched little cigars in several markets
in Europe, Canada, Iraq and Ukraine, and total
markets are growing within this niche. Still a new
product in the market place, we have grown sig-
nificantly in this niche in the markets where little
cigars have been recently launched. Although this
growth has been offset by decline in the US market,
we have successfully achieved double-digit growth
in little cigars.
During the year, we grew our pipe tobacco net
sales by 5.1% in local currencies in the face of
significant total market declines in the core Euro-
pean and US markets. Today, we lead the category
with more than 50% of the global market for tra-
ditional pipe tobacco. Growth in the pipe tobacco
category was spearheaded by Australia and West
Africa, which account for almost one fifth of our
pipe tobacco volumes.
The total market for fine-cut tobacco is growing
by about 2% a year, led by Southern and Western
Europe. It continues to decline from a high basis
in the US and the Nordics, which have traditionally
been strongholds for Scandinavian Tobacco Group.
In 2013, we managed to grow by 6.3% in the cat-
egory through launches in new markets, including
Germany, Spain, Switzerland and Israel.
1404044EogSN71192
OUR DEVELOPMENT,
REGION BY REGION
We are matching our effort to grow in new catego-
ries with the expansion of our footprint in markets
where we do not have a market-leading position.
This strategy is paying off, with growth in all geo-
graphies except the Nordics and Western Europe.
In 2013, two-thirds of our net sales were generated
in geographies where we are growing our business.
CONTINUED GROWTH IN NORTH AMERICA
We grew our net sales in North America by 2.2%
(CAGR 2011-13: 5.3%) in a slightly decreasing mar-
ket. The North American market accounted for
37.9% of our total net sales in 2013.
General Cigar leads its market for premium hand-
made cigars with a market share of around 25%.
Following several years of growth, in 2013, it faced
stock reductions at a few large accounts, while its
business levels with its other customers were un-
changed from the previous year.
General Cigar continues to take an innovative ap-
proach to the market, delivering more than 100
new products and initiatives into the market
place in 2013. Sales from these new initiatives
keep paying off and account for more and more
of net sales. Among many initiatives are the 2013
collaboration between the Cohiba brand and the
rapper Shawn "Jay Z' Carter in their bid to reinvent
modern luxury, as well as establishing the highly
innovative Foundry boutique brand. General Cigar
also launched 'freshness packages", which do away
with the need for humidor-storage so that over
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/13
CIGARS PRODUCED
IN 2013
20,000 convenience stores can now carry premium
handmade cigars.
lt is still early days for General Cigar's focus on Eu-
rope, but early signs are encouraging as they de-
liver double-digit growth rates from a low basis in
selected markets.
Staying in North America, Cigars International has
extended its market leadership with double-digit
growth. Today, this internetand catalogue retailer
counts for one in five handmade cigars sold in the
US. The growth is driven by strong customer acqui-
sition and retention, based on its innovative cul-
ture and direct-marketing skills that ajm to meet
each customer's individual demand for something
new. In 2013, Cigars International increased focus
on pipes and pipe tobacco and extended its cus-
tomer base with mostly pipe smokers through the
acquisition of PipesandCigars.com.
Together with new service offerings to retailers, a
superstøre retail concept and several other innova-
tions, the internet and catalogue business outpaced
the category.
We acquired Scandinavian Tobacco Group Lane (STG
Lane) in 2011, and it now serves the US market for
fine cut, pipe tobacco and machine-made cigars. The
total markets for fine cut and traditional pipe to-
bacco are in decline inthe US, and although STG Lane
has won share in both categories, volume and net
sales from these categories both dedlined in 2013.
5,000 TONS
FINE CUT AND PIPE TOBACCO PRODUCED
IN 2013
In 2013, STG Lane introduced 20 new machine-
made cigars into the market place. These were well-
received by customers and are undergoing refine-
ment to resonate even better with consumers. STG
Lane's focus on developing more key account sales
also proved successful — several new collaborations
induded Walmarts listing of several cigar brands.
Although Canada's tobacco market is heavily regu-
lated, our business there grew in local currency.
We achieved this in both the handmade and the
machine-made cigar markets and through the suc-
cessful introduction of little cigars.
A MIXED PICTURE IN EUROPE
The European market for cigars, pipe tobacco and
fine-cut tobacco presents a mixed picture. Total
markets are declining significantly in Northern Eu-
rope, as are søme Western European markets such
as Belgium, the Netherlands and to some extent
France. Total markets are flat in Southern Europe
and Germany. Most markets are being affected by
consumers' continued down-trading to cheaper
variants.
European markets account for 44% of the Group's
total net sales. Being market leader in Northern
Europe, Belgium, the Netherlands and France, we
saw our net sales in Europe decline by 7.5% in lo-
cal currencies (CAGR 2011-13: 2,3%). The decline
comprises a fall of 2.6% in Northern Europe (CAGR
2011-13: -1.5%) and of 13.3% in Western Europe
due to destocking in France (CAGR 2011-13: -3.6%).
14 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
METSAEE GM KE GiUMS Al arket BRUCE SS,
11.5% 4%,
Oceania
53% em Sdk
| je Worl
om — 15% — =36% — 09%
CAGR ferm urene Northern Western Southern | |
2011-2013 | | Europe Europe Europe | | |
ELIT 3 l
In Southern Europe, we grew our net sales by 5.5%
(CAGR 2011-13: 0.9%).
Northern European markets are mature and being
affected by smoking bans. Together with consum-
ers'down-tradingto cheaper variantsand a decline
in pipe tobacco, this has affected our business in
the UK even though we grew our market shares in
2013. Café Créme was challenged while Moments
did very well. In Norway and Denmark, where we
are market leader, we maintained our position
within the fine-cut category but were affected by
dedinein the total market. Our netsalesinthe Dan-
ish cigar market stayed flat, supported by growth
in little cigars.
Following a year of growth, in 2013 Western Eu-
rope delivered net sales below previous years. In
our largest market, France, stock reductions ac
count for half of the decline in net sales in the
machine-made cigar category. We saw double-
digit growth in both France and Belgium for the
handmade cigars category. In Belgium, we rede-
signed the market-leading Mercator brand, which
has continued to perform well. We also launched
fine cutin Belgium, the Netherlands and Germany,
where it has grown strongly from a low basis.
In Southern Europe, growth was led by Spain and
Italy, which are both big markets før cigars and fine-
cut tobacco. In both markets, we grew in machine-
made cigars, led by our launch of little cigars in
Spain where fine cut also does very well. In Portugal,
fiscal policies have changed the excise structure sev-
eral times over the last couple of years. This has hit
the fine-cut market, but our overall performance is
level with last year. Café Créme in particular keeps
winning market share and now leads the market
for machine-made cigars in Portugal with a share
of møre than 50%.
DOUBLE-DIGIT GROWTH IN AUSTRALIA AND
EXPORT MARKETS
Our Oceania and Rest of the World regions grew
by 18.1% in 2013 (CAGR 2011-13: 12.5%). Together,
they now account for 18.1% of our business.
Oceania includes Australia and New Zealand. The
heavily regulated Australian market introduced
plain packaging in December 2012. Despite this,
in 2013 we achieved double-digit growth in our
Australian volumes and net sales in machine-
made cigars, pipe tobacco and fine cut. This was
due to increased market activities and a swift
response to the new regulatory regime. In New
Zealand, we grew our categories pipe tobacco
and fine cut. In total, Oceania grew by 27.2% in
2013 (CAGR 2011-13: 17.5%).
Our Rest of the World region, which covers export
markets, grew by 13.1% in 2013 (CAGR 2011-13:
9.4%). There are several pockets of growth in this
region, the most prominent being West Africa, Is-
rael, Ukraine and Global Travel Retail.
FINANCIAL OUTLOOK
FOR 2014
In the comingyears, we will continue to consolidate
the Group in order to fully benefit from the merger
ofScandinavian Tobacco Group and Swedish Match
in late 2010, while simultaneously preparing for fu-
ture growth through various sales, marketing and
product-development initiatives. Thereby we focus
on leveraging our leading scale and focus on the ci-
gar, pipe tobacco and fine-cut niches. Based on our
planned activities, management expects continued
growth in net sales in local currencies during 2014,
which supports the ambition to deliver improved
earnings.
Sales volumes of cigars and pipe tobacco are in
general under pressure due to the decreasing total
market volumes in many of our mature core mar-
kets and shifts in consumer preferences driven by
excise changes. Furthermore, the general economic
environment is having an impact on all tobacco cat-
egories. However, the Group will continue to focus
on growth through increasing market share, inno-
vation, product development and expansion into
new markets. We will strive in this way to deliver
future growth in net sales and profit.
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 15
REGULATORY
DEVELOPMENTS
Regulators in the EU and the US are revising how
tobacco is regulated.
In the EU, a revised tobacco directive has largely
been agreed on. Among other issues, this dealswith
health warnings, pack sizes, product descriptions,
ingredients and traceability. The directive differ-
entiates in some respects between the different
productcategories—e.g. itallows longer implemen-
tation times in relation to certain rules for products
other than cigarettes and fine-cut tobacco.
In 2014, the United States Food and Drug Admin-
istration (FDA), which already regulates cigarettes
and fine-cut and smokeless tobacco, is expected to
publish regulation of cigars and pipe tobacco for
public consultation. Itis not clear at this pointwhat
this regulation will imply, but should the FDA wish
to regulate cigars and pipe tobacco in the same
way as cigarettes and fine-cut tobacco, this would
imply heavy technical and administrative burdens
for the Group's US businesses.
Qur business is affected by regulation on national
and supranational levels in various ways. We cannot
make accurate conclusions regarding the long-term
effect of the increasing smoking bans on sales. It is
clear to us, however, that restrictions like display
bans in retail stores and standardised packaging do
impede the introduction of new products and limit
competition. They also limit consumer choice, be-
cause smaller products will disappear while the
strongest categories and best-established brands
receive a competitive advantage. Larger manufac-
1404044EHogSN71193
turers are likely to cope better with the growing
administrative burden, heavier reporting require-
ments and required investments that come with
the increasing regulation of production, products
and packaging. However, the complex product
portfolios in the cigar and pipe tobacco categories,
with many different types and sizes of products and
packaging, and the often small volumes, can put
very heavy demands on manufacturers.
New regulations affect all manufacturers in our
industry. We believe that we are one of the com-
panies best positioned to cope with the develop-
ments to come in our industry. Not only are we a
market leader, we also have the skills, resources
and systems to deal with the added complexity,
limitations and changes that new regulatory re-
gimes will bring.
We believe that we
are one of the compa-
nies best positioned
to cope with the de-
velopments to come
in our industry.
16 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
6,000 TICKETS SELL OUT IN TWO MINUTES
Every spring, cigar smokers have a blast with Cigars International.
6,000 smokers from every state in the US meet for the annual CIGAR
fest, building a spirit and loyalty around the Cigars International
brand that is envied by many companies. The 6,000 tickets for Cigars
International's 10th Cigar Fest sold out in just two minutes.
2013 IN HIGHLIGHTS 'D
CONSUMERS, RETAILERS AND
JOURNALS REWARD INNOVATION
Scandinavian Tobacco Group was repeatedly recognised in 2013.
Most prominent were a Robb Report trophy and the Best in Show
award at the IPCPR trade show, which was attended by nearly
350 manufacturers and more than 2,200 retailers in the US. Gen-
eral Cigar's stunning "Breaking Boundaries” exhibit summarised the
Group's commitment to expand the premium cigar category by cre-
atinga brand for every occasion and an occasion for every brand.
SS
CIGARS INTERNATIONAL EXTENDS PORTFOLIO
WITH PIPE TOBACCO
Cigars International acquired the catalogue and internet business
PipesandCigars.com during the year. This acquisition has broadened
Cigars International's offering to smokers with the addition of pipes
and pipe tobacco, and is adding many new consumers to its business.
By dealing with Cigars International, pipe smokers gain improved cus-
tomer service, faster shipping and lower fees on expedited shipping.
MACANUDO SPONSORS BIG BREAK TV SERIES
Golf is the perfect outdoor occasion during which to enjoy a premi-
um handmade cigar. In 2013, Macanudo partnered with NBC sports
and its no. ] rated cable station, The Golf Channel, to sponsor its top-
rated show called Big Break. This hit series features men and women
competing in skills challenges for an opportunity to qualify fora PGA
or LPGA tour event. In its 10th season, Big Break generated over 450
million household impressions in the US and for the first time pro-
moted America's bestselling premium handmade cigar on television.
Fumer nuit gravement
å votre sånte et å celle
de votre entourage
RELAUNCH FOR THE WORLD'S NO. 1 SELLING CIGAR
We redesigned Café Créme on its 50th anniversary to send a clear
signal to our customers that the world's no. 1 selling cigar is commit
ted to remaining focused on the consumer and adding value to our
customers' business. Café Créme has strongholds in France, UK, Italy,
Spain and Portugal and is søld in more than 100 countries. When first
launched 50 years ago, it was a break-through innovation in the cigar
industry, transforming the cigar into 'a smooth smoke'.
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/17
NEW RECORDS IN SPEED DATING AND CIGAR PRODUCTION
In a focused initiative to consolidate our cost leadership, we con-
tinued to optimise our production footprint for machine-made
cigars, including reducing the number of factories from six to four
in the 6-2-4 project. The project is close to completion and the
social integration of employees transferred to what is probably the
world's largest cigar factory, STG Lummen in Belgium, is progressing
well. At a one-day event, 550 employees broke the Guinness World
Record for speed dating as part of a 'getto-know-you' exercise for
employees from the Lummen factory and the dosed factory in
Houthalen, Belgium. In late 2013, the Lummen factory also broke its
own record with 7,021,144 cigars produced in a single day.
JULY SEPTEMBER
DD
WALMART LISTS CUBERO AND CAPTAIN BLACK
Our Cubero and Captain Black brands have been available from
4,043 additional US stores since last October. This followed their list-
ing by Walmart, gaining distribution in almost every Walmart Super-
center, Discount Store and Supermarket in the US.
1404044EogSN71194
NOVEMBER
JAY Z AND GENERAL CIGAR REINVIGORATE THE SUPER
PREMIUM CATEGORY
Cohiba has partnered with Shawn "Jay Z' Carter to strengthen Cohi-
ba's luxury positioning and to broaden its appeal as the preeminent
super premium cigar brand in the US. This collaboration started
more than two years ago and has resuited in a new cigar called Cohi-
ba Comador that utilises rare tobaccos, proprietary processes and
contemporary and innovative packaging.
nen.
barer sm
i yen
ss nr hh
motiv
badede”.
le ksedyrseard
feta
1404044EogSN71195
ARS
| OUR ROUTE 2016
| — STRATEGY
GROWTH
[1 Further develop our core markets and
win market share within cigars, pipe
tobacco and fine cut
i Grow market share in the major mar-
kets for machine-made cigars in the US,
Germany, Italy and Spain
).… Grow market share in handmade cigars
in the US and expand internationally
Explore geographica! expansion into
new markets in Asia, the Middle East,
Eastern Europe and West Africa
i Grow market share in the US internet '
and catalogue business for premium :
cigars and pipe tobacco, and further i
expand into the retail sector
rå Leverage our unique combination of
strong global, regional and local brands
10 Ensure and develop sales and commer-
i | cial excellence
i
; Enhance our innovation leadership,
based on consumer insights and pro-
duct development
VISION
To be a dynamic and innovative tobacco
company with growing leadership in
cigars and pipe tobacco and a significant
position in fine cut.
MISSION
With great brands and talented and curious
people we give smokers the best smoking
enjoyment and thereby secure continuous
growth in turnover and profit.
N
i
,
EFFICIENCY
& QUALITY
Ensure and consolidate our lead-
ing position as a cost-efficient
manufacturer of quality cigars,
pipe tobacco and fine cut
Reduce complexity to lower cost
and improve productivity while
enabling product innovation
Leverage group purchasing scale ;
Leverage best practice across
functions and countries
Drive continuous improvements
in our environmental, healthand
safety standards
PEOPLE
Build One Company Culture >"
based on common values
Improve leadership and
performance management
Strengthen skill building
Ensure high level of
employee engagement
OUR VALUES
TRUST builds better performance
TEAMPLAYER. Together we are better
RESPONSIBLE. We are accountable
INNOVATIVE. We challenge
conventional thinking
PASSIONATE. We love what we do
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/21
ROUTE 2016
OUR STRATEGY
IN AGTION
Our 'Route 2016' strategy was developed follow-
ing the merger of Scandinavian Tobacco Group and
selected Swedish Match businesses in 2010, which
created a world leader in cigars and pipe tobacco.
The core aspiration of our strategy is that by 2016
the Group will fully benefit from leveraging our
market leading position and from focusing solely
on cigars, pipe tobacco and fine-cut.
Qur vision is to grow our market leadership in ci-
gars and pipe tobacco and to build a significant
position in fine cut. Building on our strong values,
we will achieve this through our 'great brands' and
'talented and curious people”, whose work to give
smokers the greatest enjoyment secures our con-
tinuous growth in turnover and profit.
We are facing challenges such as changing con-
sumer habits, volumes pressure and a continuously
shifting regulatory environment. In 2013, volumes
declined faster than anticipated, including in our
core markets.
We have developed our strategy specifically to
meet these challenges:
IMPROVED GEOGRAPHICAL FOOTPRINT AND
GROWTH IN CATEGORIES
At the time of the merger, our strongholds were
in those geographies and categories that have
been declining the most. Since then, we have
built stronger market positions in growing cat
egories such as little cigars and fine cut, and in
new geographies where we see opportunities for
1404044EogSN71197
our portfolio. Today, our position is growing in all
categories except machine-made cigars, and in all
geographies outside Northern and Western Eu-
rope. Our growing regions account for more than
60% of our net sales.
IMPROVED SUPPLY CHAIN LAYOUT
We have changed our factory footprint since the
merger in order to consolidate our leading posi-
tion as a cost-efficient manufacturer of quality
cigars, pipe tobacco and fine cut. This is the case
in our handmade cigar, our pipe tobacco and our
fine-cut supply chains. We have also made sub-
stantial changes in our machine-made cigar sup-
ply chain, where we are reducing the number of
manufacturing sites from six to four factories and
investing significantly.
More key initiatives are listed on the facing page.
STRATEGY REFINEMENT: MORE EFFICIENCY
AND INNOVATION TO COME
Although our performance in 2013 was strong given
the challenges across our total markets, we have
nonetheless further reviewed our strategy. Our
markets still offer significant growth opportunities,
and 'Route 2016" positions Scandinavian Tobacco
Group well to seize these. The review confirmed
our strategy while refining it further.
Ourresponse to possible further decline inthe total
market is to focus even more on innovation and
product development together with an increased
emphasis on delivering efficiency.
Initial synergies were obtained primarily from the
merging of our commercial organisations, and we
are now also beginning to see the full effect of an
integrated supply chain.
Our strategy outlines an ambitious innovation
agenda, which aims to deliver an innovative mind-
set across the organisation alongside a stream of
tangible break-through innovations in the mar-
ket place. Following the review of our strategy,
we are pushing even harder to bring innovation
and newly developed products to the consumer.
Today, we have a stronger pipeline of innovative
products thanks to a structured approach that
includes our investments in consumer insights, a
cross-organisational innovation team dedicated
entirely to break-through innovation projedts, and
an improved set-up for transforming innovation
concepts into market-ready products.
Furthermore, we are continuing to focus on the
three pillars of our strategy:
m= To build undisputed market leadership
m To sustain cost leadership in our supply chain
= To develop a winning organisation
22 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
GROWTH
We are building market leadership and winning
market share by developing our core markets,
expanding our geographic footprint and develop-
ing our different tobacco categories. Markets with
high growth potential include the machine-made
cigars markets in the US, Germany, italy and Spain,
together with handmade cigars. New markets such
as Asia, the Middle East, Eastern Europe and West
Africa also offer growth opportunities. Our internet
and catalogue business in the US is growing fast
and is further fuelled by our expansion into retail.
We are also achieving growth by investing in the
fine-cut and little cigar markets, and by maintain-
ing and developing contemporary products that
resonate with consumers. Developing brands and
products that address the demands of cigarette
smokers is also a huge opportunity (see our chapter
on categories and brands, pages 26-33).
Our organisation has been organised to support
these goals and we have taken back distribution
of our own products in for example Australia lev-
eraging our expertise into the sales and distribu-
tion areas.
Our strategy has a dual focus: developing core stra-
tegic brands with international business potential;
and safeguarding strong regional and local brands
to take advantage of our current strongholds and
to meet local consumer preferences. Brands with in-
ternational potential include Café Créme, Captain
Black, Macanudo and our newly developed value-
for-maney brand, Break. Our work is progressing
according to plan with several new launches, re-
designs and other brand initiatives.
The global roll-out of the sales excellence pro-
gramme we initiated in 2011 aims to streamline
sales processes and increase efficiency by offering
shared tools and training. In 2013, our entire sales
organisation participated in brand-related train-
ing programmes, and local trainers were trained
to enhance local capabilities to enable even more
skills building.
Innovation plays a crucial role in the development
of our business and has been further reinforced
following the review of our strategy in 2013.
EFFICIENCY & QUALITY
Cost leadership is sustained by improving the lay-
out of our factories and reducing complexity.
In machine-made cigars, the 6-2-4 project has
changed our supply chain footprint, transferring
cigar production from Pasuruan in Indonesia and
Houthalen in Belgium to the four remaining sites
in Belgium, the Netherlands, Denmark and Pan-
daan in Indonesia. These remaining sites have all
been prepared for the manufacture of increased
volumes through an ambitious investment pro-
gramme.
In fine cut, we are bringing the production of
expanded tobacco in-house to a new factory in
Holstebro, Denmark, thereby ensuring stability of
supply and significantly lower tobacco costs. This is
leading to improved competitiveness in this mar-
ket, which is one of the fastest growing categories.
The new factory is expected to be completed in
late 2014.
We reduce complexity in blends, formats, leaf
grades and ingredients across our supply chain,
leading to improved productivity.
To assure quality, ensure traceability and lower
the number of rejected cigars, General Cigar has
centralised its quality assurance and implements
barcoding on each individual handmade cigar from
all its factories.
PEOPLE
The talent and curiosity of our employees are as-
sets that give us competitive edge and enable us
to deliver on our strategy.
We nurture talent and curiosity by promoting a
One Company Culture that builds on trust to en-
able us to take advantage of the diversity and
many different skill-sets and perspectives of our
employees. Trust is among the five core values
thatglue the Group together, having been created
from many acquisitions and the merger between
Scandinavian Tobacco Group and Swedish Match.
Together with improved leadership, succession
planninganda high level ofengagement, the foun-
dation stones of our winning organisation are our
One Company Culture, our values, our talent and
our curiosity.
We developed our values in 2011 and continued
their company-wide implementation in 2012 and
2013. Our values ensure a consistent profile in
the market and provide us with guidance in our
decision-making processes. We believe that our
employees have a high level af ownership of our
values. According to a survey of new employees,
our values are very visible to new employees and
lived by the organisation. Our 2014 employee en-
gagement survey, STG Insight, will monitor and
track progress.
This survey will also measure the level of employee
engagement. When conducted in 2011, the sur-
1404044EogSN71198
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 23
vey showed this to be above average compared
to external Fast Moving Consumer Goods (FMCG)
benchmarks and on a level with high-performing
companies world-wide. Key drivers for engagement
among our employees are clear job responsibilities,
high ethical standards and a daily commitment to
deliver quality in every job. We believe that these
elements are fundamental for our employees' abil-
ity to fully unleash their talent and curiosity.
To ensure leadership quality and consistency across
the Group, we invest in a systematic approach to
leadership, people reviews and succession plan-
ning. The purpose of our leadership initiatives is
to maximise the potential of each individual leader
and our leaders as a group. In 2013, our top 60 lead-
ers participated in the Trusted Leader Programme
that aims to enhance leadership both individually
and as a group, and to ensure that our leaders
have the leadership skills to grow our business.
The Trusted Leader Programme continues into
2014 and is being expanded to the next level of
managers.
We support the leadership programme with a
systematic approach to the people review pro-
cess, which assesses performance and potential
resulting in a succession overview and plan across
the Group. In 2013, succession planning was rolled
out across the Group ensuring that our competi-
tive edge in the market can be developed and
maintained.
DIVERSITY
-ÅA SOURCE OF
STRENGTH
We embrace workforce diver-
sity as a source of strength. It
leads to increased innovation,
increased team performance
and better problem solving
abilities. it is our ambition that
25% ofourshareholder-elected
board members will be women
by 2017. In 2013, we adopted
a Diversity and Indlusion Policy
guiding us in embracing diver-
sity. The policy aims at ensur-
ing stronger gender diversity in
managerial positions which in
the majority of business areas
means increasing the number
of women. Going forward, we
convert the policy into actions
that secure gender diversity
across our business.
onion vel:
1404044EogSN71199
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 27
LEVERAGING OUR
GATEGORIES AND
BRANDS
Scandinavian Tobacco Group has solid expertise in
tobacco and a unique combination ofstrongglobal,
regional and local brands. By leveraging this equity,
we are able to grow our leadership in cigars, pipe
tobacco and fine cut.
Every year, we carry out hundreds of initiatives
to improve our brands and categories. Following
the merger of the Swedish Match and Scandina-
vian Tobacco Group portfolios, our brands have
been repositioned and developed to capture
changing market dynamics and meet consumer
preferences.
In machine-made cigars, we have strengthened
our market position by improving the taste and
adding filter and flavour variants to our portfolio,
all while ensuring a contemporary look and feel
through several redesigns of different brands. In
handmade cigars, product development and in-
novation across all marketing disciplines play an
important and wide-ranging role in meeting con-
sumers' desire to have new experiences. In pipe to-
bacco, our focus is on maintaining and developing
strategic brands that we can take into new markets.
Finally, in fine cut we pursue an aggressive growth
agenda by building strong regional brands, going
into expanded tobacco and launching in new ge-
ographies. We have also launched several brands
across categories.
Not only do we develop and safeguard strong re-
gional and local brands in all categories, we also
develop core strategic brands with international
1404044EogSN71201
business potential. Among these are iconic brands
such as Café Créme and Macanudo. As benchmark
brands within their categories, these can realise un-
tapped potential when nurtured, revitalised and
eventually taken into new markets.
IN THE EYES OF OUR CONSUMERS
Since the launch of our 'Route 2016" strategy, we
have taken a more consumer-centric approach to
innovation and product development. We have
gained considerable insights into consumer pref-
erences, habitsand needs, strengthening our ability
to attract cigarette smokers to the cigar category
by developing new brands, improving the taste of
existing key brands and strengthening our perfor-
mance in aromatic cigars.
The markets for cigars and pipe tobacco are to a
large extent local and regional. At Scandinavian To-
bacco Group, we build brands for a large number of
markets, offering a brand, a variant and a smoking
experience for every occasion.
28 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
HANDMADE CIGARS
The Group is US market leader in handmade cigars.
The market accounts for two out of three handmade
cigars sold globally and was slightly decreasing com-
paredto 2012. Given our low marketshares in Europe,
the region offers growth opportunity for our Group.
Consumer preferences change quickly. Two out
of three consumers ask for 'something new' when
purchasing handmade cigars. Some tend to choose
smaller and cheaper cigars and boutique brands
are quickly gaining higher market shares.
As a market leader, General Cigar is working to ex
pand its portfolio and strengthen its position by
launching more than 100 brands within all hand-
made cigar segments, from super premium to value.
Furthermore, with smoking bans impacting occa-
sions and purchase frequency, General Cigar has
activated an occasion-based marketing strategy
targeting core brands against specific consumer
segments and related smoking occasions.
Based on its unmatcåed database and analyticll skills,
Cigars International supports its suppliers by meeting
new consumer demand through constant innovation.
FACTS ABOUT HANDMADE CIGARS:
No. I market position inthe US
23% of our netsales
KEY BRANDS (« US only)
Luxury: Cohiba" and Partagas"
Premium; Macanudo, CAO, Punch” and Hoyo de Monterrey”
Boutique: La Gloria Cubana" and Foundry
Value-for-money: Don Tomas and Sancho Panza"
sm
| | |
å HE i i
MACHINE-MADE CIGARS
Scandinavian Tobacco Group leads the European
machine-made cigar market and has a sizeable
growth opportunity in North America. In the US,
volumes are growing in a market that is almost as
large as the declining European market. Overall,
total market grows slightly.
In the premium segment, smokers tend to be loyal
to the brands and productsthey know as they value
their quality and consistency over time. Those in
the mainstream segment are becoming increas-
ingly interested in aromatic variants, smaller sizes
and, in many cases, less expensive cigars.
With Café Créme, we have the strongest global
brand in the machine-made cigar category. Our
portfolio also contains a large number of strong
regional and market-leading loca! brands. Over the
last three years, we have repositioned and rede-
signed our leading brands, and we have broadened
our portfolio with new flavours, smaller sizes, tips
and filters to meet consumer demand.
We continue to aim for genuine break-through in-
novation in the category, building on in-depth con-
FACTS ABOUT MACHINE-MADE CIGARS:
No. 1 market position in Europe”
42% of our netsales
KEY BRANDS
Premium: La Paz, Henri Wintermans, Oud Kampen and Petit
Mainstream: Café Créme, Captain Black, Mercator and Ché
Value-for-money: Talon, Break, Moments, Cubero and Blues
sumer insights in selected key markets to develop
several new innovations that will be launched in
forthcoming years.
In particular, we have developed new brands for
the US market and the value-for-money segment
where little cigars play a significant role. In the US,
our machine-made cigars have been well-received
by our customers; we continue to intensify our
product development efforts to meet consumer
demands in this growing market.
Little cigars are a growing force in the niche mar-
ket meeting consumer demand for an inexpensive
cigar. We have launched new regional brands in
this growing value-for-money segment, which is
expected to diversify in years to come. In the EU,
regulation demands the use of natural wrappers
for little cigars, strengthening opportunities før us
to grow in the category.
PIPE TOBACCO
The Group is champion of the global pipe tobacco
market with a market share of over 50%. Our key
markets are in Europe and North America, but we
also see growth in West Africa. Overall, however, the
total market volume continues its long-term dedine.
Pipe smokers in general like to experiment with
blends, but tend to remain loyal to their favourite
brands. Down-trading does not apply to pipe to-
bacco to the same extent as it does to other catego-
ries. On the contrary, there is an increasing demand
for luxury pipe tobacco in selected niche markets.
Our tobacco specialists continue to refine pipe to-
bacco blends and concepts that qualify for global
leadership in different segments of the category.
At the same time, we are reducing complexity in
our supply chain.
We have reintroduced strong brands such as Cap-
tain Black and Erinmore in markets where they have
strong brand recognition, but were declining until we
tookthem over. WØ. Larsen celebrates its 150th birth-
day in 2014. We keep enhancing the brand's luxury
equity with innovative blends and limited editions.
FACTS ABOUT PIPE TOBACCO:
No. 1 market position globally
10% of our net sales
KEY BRANDS
Premium: W.Ø. Larsen and Erinmore
Mainstream: Captain Black, Borkum Riff and Clan
Value-for-money: Smoker's Pride
1404044EogSN71202
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 29
FINE-CUT TOBACCO
We are a fine-cut tobacco market leader in the Nor-
dics and the US. Total markets are growing in Eu-
rope but declining in the US. In total, fine-cut vol-
umes are growing by about 2% year-on-year.
Consumers in the fine-cut market are very price
driven, especially within the Make Your Own (MYO)
segment. Expanded tobacco is growing fastest, but
the All Natural segment is also on the rise,
Having expertise in the Nordic and the US fine-
cut markets, we have a proven track record with
market shares ranging from 39% to 78% in our
key strøngholds. We are growing our business
through consolidating our market leadership in
the Nordics and the US and entering new markets
in Europe. We have also introduced new and re-
positioned brands into the value-for-money seg-
ment.
With the opening of a new factory for expanded
tobacco in Holstebro, Denmark, in late 2014, we will
improve our competitiveness in the fine-cut mar-
ket further through a lower cost base and greater
stability of supply.
FACTS ABOUT FINE-CUT TOBACCO:
No. 1 market position in the Nordics and the US
9% of our net sales
KEY BRANDS
Premium: Tiedemanns, Bali Shag and Cross Road
Mainstream: Escort and Bugler
Value-for-money: Break and Salsa
30 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
COHIBA
COHIBA
Cohiba is one of the world's most luxurious pre-
mium cigar brand enjoying the highest levels of
consumer awareness and brand equity. Cohiba
grows market share and outperforms the pre-
mium cigar category.
General Cigar owns the brand in the US and fo-
cuses on enhancing the super premium equities
of the brand by executinga strategy that uniquely
aligns Cohiba with modern luxury.
Insupportofthisstrategy, Cohiba hascommenced
a partnership with Shawn Jay Z' Carter to intro-
duce a super premium cigar called Cohiba Co-
mador. Worldwide, Jay Z is known as a celebrity
who has unmatched business and entrepreneurial
acumen. In addition, it is widely known that he is
a connoisseur of the luxury lifestyle. Cohiba's as-
sociation with Jay Z has broadened the consumer
base, strengthened its super premium equities
and built awareness of Cohiba as the preeminent
modern luxury cigar brand.
The initiative is supported by 'The Cohiba Luxe
Program', an exclusive retailer partnership de-
signed to enhance the overall equities and es-
sence of the brand, aligning Cohiba with modern
luxury in the mind of the consumer, in-store and
on shelf.
MACANUDO
Macanudo is the best-selling premium cigar brand
in the US. Known as America's Cigar and the 'Ulti-
mate Cigar, the brand builds on a heritage unlike
any other.
At a time when more brands than ever are com-
peting for humidor space, retailers carry Macanudo
because it is a trusted, well-known and approach-
able premium cigar that delivers consistency and
quality in every smoke.
Macanudo extends its promise to new cigar smok-
ers and deepens the brand's relationship with
current consumers through continuous product
development, by deepening its relationship with
the sport of golf as well as through the expansion of
premium handmade cigar availability. A core initia-
tive for Macanudo is its 'freshness packages' which
eliminate the need før humidor-storage and allow
new stores outside of the category to sell premium
cigars.
Macanudo has potential to grow outside the US.
Therefore, a revitalised Macanudo brand and cigars
will be introduced with a unique blend and packag-
ing designed to appeal to the European consumer.
CAO
CAO
CAO is a core boutique brand within the General
Cigar portfolio and has an international footprint
as well.
In the US, CAO's positioning is modern, edgy and
sometimes irreverent. As one of the pioneers in
the boutique segment, CAO has a long successful
history of innovation.
The brand continues delivering best-in-class inno-
vations by launching Flathead to rave reviews. This
collection of cigars offers a unique blend, format
and package that CAO consumers widely accepted,
resulting in one of the most successful new product
introductions that General Cigar has seen in years.
Outside the US, CAO strengthens its position as
an international brand with continued growth in
many countries.
Fiy'
BAR Af LERNER HILL
FOUNDRY
Foundry is one of the most innovative and imagi-
native brands in the handmade cigar category. Re-
cently established as the leading-edge cigar brand,
Foundry does well in the boutique segment.
The boutique segment continues to gain notoriety
and market share within the US. With a commit-
ment to gain share in this important aspect of pre-
mium hand rolled cigars, General Cigar launched
Foundry in 2012.
The brand provides the company with the oppor-
tunity to compete with other leading boutique
brands, most of which are smaller independent
companies that are led and managed by their re-
spective owners/founders.
The brand is unlike anything ever seen in the
category. Foundry throws away conventional ap-
proaches and pioneers the use of tobacco, packag-
ing and in-store activation.
The strategy is to build the brand into a boutique
division called The Foundry Tobacco Company. Of-
ficially launched at the IPCPR in 2013, this launch
was supported by introducing a new brand under
Foundry Tobacco Company called Elements, Com-
pounds and Musings.
1404044EogSN71203
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/31
CAFÉ CREME
CAFÉ CREME
Café Créme has been market and category leader
since it was launched in 1963. its proven sales re-
cord and global availability today make Café Créme
the no. 1 cigarillo in the world.
Café Créme fulfils an important role as a truly
global! brand within Scandinavian Tobacco Group.
The brand is available in more than 100 countries
and has particular strongholds in France, the UK,
Australia, Spain and Portugal.
Café Créme's popularity is due to its smooth and
pleasurable smoking experience as well as the
brand's innovation in size and packaging, making
it a benchmark brand for other cigarillos.
Café Créme continues to improve its strong posi-
tion in the mainstream segment, re-establishing
the brand as a smooth and easy-to-smoke cigar.
Most high profile istheredesign ofthe brand, which
will hit the majority of markets in 2014. This is fol-
lowed by an improved smoking experience and a
re-launch of Café Créme's filter and flavour variants;
together with smaller cigarillo formats such as Café
Créme Finos and Piccolini. These variants are grow-
ing their shares of the overall brand.
LA PAZ
La Paz is the Group's second largest machine-made
cigar brand. ft is in the global top five of the cat-
egory.
La Paz means 'peace' in Spanish, but the brand was
developed in the Netherlands in 1813. Today, this
premium cigar brand is well-positioned in neigh-
bouring countries. France accounts for half its sales,
whilethe Netherlands, Spain and Belgium are other
big markets.
La Paz has the potential for further geographical
expansion. We are supporting this by revitalising
the brand through values such as authenticity,
masculinity and vitality, and by leveraging its in-
novative approach within the category. La Paz is
the first and so far the only machine-made cigar
to have a natural filter, making it possible to add a
filter and still keep La Paz Filtro de Tobacco 100%
natural.
La Paz accounts for half the world market of the
'wilde' segment of cigars, which have a feathered
fire end called the 'flos' or 'wilde end". This was in-
vented in 1969 — the story goes that the first La
Paz Wilde was created by accident when the knife
to cut the fire end went missing after machinery
maintenance. It might not be true, but it is a nice
story nonetheless.
32 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
CAPTAIN BLACK
Captain Black is a well-known brand in the US, the
Middle East, Eastern Europe, parts of Africa and
Asia.
Originally a pipe tobacco brand in the US, Captain
Black has a heritage as an international, cross-
category brand including pipe tobacco, cigars and
little cigars. The journey began in 1973, when Lane
Limited set its sails and Captain Black rapidly be-
came the number one-selling pipe tobacco brand
in the US. The brand entered the cigar category in
the 19905 and little cigars a few years later. Captain
Black Little Cigars enjoyed aspeedy rise to popular-
ity, which spread to the Middle and Far East.
The brand was acquired along with Lane Limited
in 2011. Being a strategic brand within the Group
portfolio, we are continuing its roll-out in the Mid-
dle East and Eastern Europe, buildingon the strong,
masculine values connected with the brand name.
Captain Black is being redesigned to build a con-
sistent brand image; new formats, flavours and
packaging are being added. The brand performs
particularly well in little cigars in Eastern Europe
and the Middle East.
COLTS
COLTS
Colts is a steady growing cross-category brand in
the Group's portfolio. Developed for the Canadian
mainstream market for machine-made cigars, the
brand has subsequently expanded into new geog-
raphies and categories.
Colts builds on the heritage of the American fire-
arm inventor Samuel Colt, and is therefore associ-
ated with masculinity and strength. This approach
is highly effective in Canada where the brand does
very well within the flavoured and tipped machine-
made cigarssegments, and in Eastern Europe where
the brand is marketed as a value-for-money fla-
voured cigar.
Colts was launched as a pipe tobacco in selected
markets in 2009. It is performing well not only
in Canada, but also in Germany, Denmark and
West Africa. Among other countries, Colts fine
cut can also be found in Japan, Australia and
South Africa.
Once a sub-brand to Old Port in Canada, the Colts
brand became the choice of a new generation of
smokers over 20 years ago. Today, 'M by Colts' has
been developed for the Canadian market, attract-
ingyetanother generation ofsmokers into the cigar
category.
år
W-Ø-LARSEN
urkdorSELIt Sk FR EAS LS
W.Ø. LARSEN
W.Ø. Larsen isa premium pipe tobacco brand dating
back to 1864 when Wilhelm Øckenholt Larsen es-
tablished his first shop and the brand in Denmark.
Today, W.Ø. Larsen has particular strongholds in
Germany, Russia, Denmark and Asia.
W.Ø. Larsen blends are Scandinavian blends with
a mellow-to-medium body and a range of flavours
including liqueurs fruits and berries, vanilla and oc-
casionally spiced tobacco.
Covering the upper end of the mainstream-to-
luxury segment, the brand gives consumers the
ultimate premium in tobacco blends. Produdts in
the W.Ø. Larsen Limited Edition series are particu-
larly successful. At year-end, W.Ø. Larsen launched
an exclusive edition tin targeted at pipe tobacco
connoisseurs. The tin has been very well received in
Asia, where gifts play a crucial role and traditional
Western products are highly valued.
The limited edition seriesaddsto the brand's luxury
equity in pipe tobacco. We are launching two lim-
ited editions to celebrate the 150th anniversary of
the W.Ø. Larsen brand in 2014, drawing further at-
tention to the potential of the premium segment
in the profitable pipe tobacco category.
Bem
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BORKUM
BORKUM RIFF
Borkum Riff is the world's most widely distributed
pipe tobacco brand, meeting consumer demand in
more than 50 markets worldwide in a category that
is typically characterised by a range of smaller local
and regional brands. Volume-wise, Borkum Riff is
one of the largest pipe tobacco brands in the world.
Developed in Sweden in the 19605, Borkum Riff
carries a Scandinavian blend which is mild, sweet
and with plenty of added flavours. The brand was
originally developed with an eye on the US market,
where it has been a best-selling brand for wel! over
30 years.
Borkum Riff has a broad portfolio, includinga large
number of variants and a taste for every prefer-
ence within the mainstream segment. The brand
has recently been redesigned and now reaches
out with a uniform and exciting design that has
great consumer impact. Limited editions also have
a significant role to play for the brand — Borkum
Riff introduces a limited edition every spring to
capitalise on seasonal sales.
Borkum Riff was originally a lighthouse located at
53? 58' N, and 6? 22' E in Heligoland Bight off the
Dutch coast in the North Sea.
1404044EogSN71204
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/33
BREAK
BREAK
Breakis the Group's fastest growing brand. Recently
developed as a cross-category brand for little cigars
and fine cut, its growth rate makes it really stand
out.
The brand covers niches where total markets are
showing most growth, and was developed to tar-
get the price-sensitive value segment in European
markets.
In fine-cut tobacco, Break captures market share
through price leadership in expanded tobacco. The
brand has been launched in this category in Spain,
Germany, the Netherlands, France and Denmark.
More markets will follow when the Group's new
manufacturing site for expanded tobacco enters
production in late 2014.
Our growth in Break little cigars has been signifi-
cant following launches in Spain, Portugal, Den-
mark, Greece and Italy within the last 18 months.
More markets for little cigars will be added going
forward.
TALON
We introduced our Talon brand just two years ago
into the value-for-money segment in the US market.
Today, itis our largest brand in little cigars, outpac-
ing Captain Black and Winchester in the US market.
The brand was also launched in Canada in late 2013.
Carrying the emblem of a bald eagle, the Talon
brand is associated with American values.
To consumers, Talon offers great quality at an eve-
ryday low price. Talon is not the cheapest on the
market, but has been true to its promise: great price
and great quality. The cigars come in the six most
popular flavours.
We have recently taken Talon, already a strong and
double-digit growing brand in little cigars, into pipe
tobacco inthe US. Because itis now a cross-category
brand, we can build on Talon's value-for-money po-
sitioningwhile increasing awareness and familiarity
among consumers and ensuring prominent facing
at retailers,
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1404044EFogSN71205
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SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/37
GORPORATE
SOGIAL
RESPONSIBILITY
Corporate Social Responsibility (CSR) goes to the
heart of our business philosophy and principles.
Acting responsibly towards the individual human
being, society and the environment is at the core
of our business. For us, this also means being per-
manently aware of the health aspects of smoking.
We therefore align our business activities with the
conduct you should expect from a responsible mar-
ket leader. We do this for two reasons: because it
sustains our business; and because we believe it is
the right course of action.
In our factories, this focus enables us to manufac
ture cigars, pipe and fine-cut tobacco in a safe man-
ner, both for our employees and with high regard
to the environment. We reduce our tobacco waste,
water consumption and emissions every year, and
we set high standards and ambitious targets for
our work environment as part of our health and
safety programme. And we participate in the fight
against child labour in those countries where to-
baccø is grown.
Scandinavian Tobacco Group acknowledges that
tobacco products are different from other con-
sumer products and thatthe health risks associated
with them require stricter regulation— in particular
to prevent children and adolescents from taking up
smoking. Tobacco products continue to be subject
to increased regulation in terms of manufacturing,
promotion, presentation, sale and consumption.
1404044EogSN71207
We support proportionate and fact-based regula-
tion of our products and market place. We ensure
compliance with local laws and regulations. And
when marketing our products, we apply self-im-
posed principles that in many cases are stricter
than local regulations.
When it comes to new regulation, we do what we
can to ensure a balanced approach to our product
categories. On the one hand, regulation should al-
ways take health issues and the protection of youth
into account. On the other hand, regulation should
also take into account that the typical consumer
of cigars and pipe tobacco is a mature adult The
consumer profile and the different characteristics
of the various tobacco product categories mean
that legislation, where relevant, should differenti-
ate between, for instance, cigars and other tobacco
products.
We want to be a trusted participant in the legisla-
tive process, and we have valuable input and views
to share specific to our products.
38 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
HEALTH AND SAFETY
itis our policyto strive for ever safer working condi-
tions for our employees around the globe.
That is why we have our Environment, Health and
Safety (EHS) programme which applies to all our
manufacturing sites in eight countries in Europe,
Central America, the Caribbean, the US and Asia.
This programme is headed by a central EKS man-
ager and supported by local site-based managers
and an external EHS consultant.
SELECTED ACTIVITIES AND RESULTS IN 2013:
In 2013, accident rates continued to improve with a
30% reduction of reported work-related accidents
compared to 2012. 78 accidents were reported.
A number of new auditors were trained and the
week-long audits and a second review cycle started
at year-end.
Site performance is assessed against the Group
standard. Our goal is for all sites to reach the am-
bitious target score of 80 on a scale of up to 100 by
2016. At the end of 2013, four out of 12 sites had
reached this goal.
NEXT STEPS:
mm Implementing action plans to ensure continu-
ous improvements to individual sites as well as
to the Group as a whole.
m= Continuing the audit cycle and completing 12
audits in 2014.
ENVIRONMENT
it is our policy to reduce our environmental foot-
print. Using less energy, generating less waste and
emitting less CO2 in our production facilities are all
everyday goals for the Group.
We manage to continuously reduce our environ-
mental footprint as part of our EHS programme.
In addition to achieving continual improvement,
we are close to finishing the 6-2-4 project that re-
configures our factory footprint in machine-made
cigars optimising our production and seeking en-
ergy-efficient solutions.
SELECTED ACTIVITIES AND RESULTS IN 2013:
In 2013, we reduced energy consumption from
manufacturing by 3%. We also managed to recycle
41% of our tobacco waste, and we reduced our CO2
emissions by 10% per tonne of tobacco.
Cedar and mahogany are used to make cigar boxes.
In the Dominican Republic and Honduras, we have
our own reforestation programme which replen-
ishes cedar and mahogany trees to replace those
we use. To date, møre than 35,000 trees have been
replanted.
NEXT STEPS:
= Continuing to reduce energy consumption,
waste generation and CO2 emissions in pro-
duction.
= Maintaining our reforestation programme in
the Dominican Republic and Honduras.
RESPONSIBLE MARKETING
We target our advertising and promotion to adults
only.
We have procedures in place that ensure compli-
ance with local laws and regulations in al! our in-
dividual markets.
We work in differentregulatory regimes in different
markets. Qur principlesset minimum standards and
govern where local regulations are less restrictive,
either because tobacco is generally less regulated
or because the regulation in place døes not cover
a specific activity.
SELECTED ACTIVITIES AND RESULTS IN 2013:
In 2013, we revised and improved our marketing
principles, setting the standard for our behaviour
in relation to consumers across the globe and in
respect of all brands owned by the Group.
NEXT STEPS:
= Training of marketing staff and others across
the Group to whom our marketing principles
are relevant and following up to ensure com-
pliance.
= Sharing the principles with our distributors in
our many export markets.
COMBAT OF CHILD LABOUR
We do not employ children and we believe that
all children should be protected against child la-
bour and have access to education. We therefore
continue our long multi-stakeholder cooperation
to combatchild labour. Through the ECLT (Eliminat-
ing Child Labour in Tobacco Growing) Foundation
and together with local governments and NGOs, we
work to create awareness of the issues and invest
in educational and other measures to improve the
livelihood of familiesthat poverty would otherwise
force to rely on child labour.
SELECTED ACTIVITIES AND RESULTS IN 2013:
In 2013, we carried out a risk assessment and pro-
gressed on designing an audit programme in rela-
tion to our tobacco suppliers.
NEXT STEPS:
m Continuing our engagement in ECLT to combat
child labour, currently focusing on Kyrgyzstan,
Malawi, Tanzania, Uganda and Mozambique.
m Renewing our tobacco supplier audits based
on our risk assessment focusing on cigar and
pipe tobacco suppliers.
1404044EogSN71208
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 39
SMOKING IS FOR ADULTS ONLY,
AND THE HEALTH RISK MUST BE
TAKEN SERIQUSLY BY EVERYBODY.
EVERY SMOKER SHOULD BALANCE
THE PLEASURE OF SMOKING
AGAINST THE RISK INVOLVED, AND
THEN MAKE A PERSONAL CHOICE
WHETHER TO SMOKE OR NOT.
WE DO NOT WORK TO INCREASE
THE NUMBER OF SMOKERS OR
TO GROW THE TOTAL MARKET
FOR TOBACCO. WE GROW
OUR BUSINESS BY GROWING
OUR MARKET SHARE AND BY
ENCOURAGING SMOKERS TO
CHOOSE OUR PRODUCTS AND
CATEGORIES OVER THOSE OF
COMPETITORS.
40 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
GENERAL CIGAR REACHES THOUSANDS WITH EDUCATION
PROGRAMMES IN THE DOMINICAN REPUBLIC AND
HONDURAS
Education is the key to a better future, so General Cigar has estab-
lished programmes that increase literacy and skills among employees
and residents of the Dominican Republic and Honduras. In the Lit-
eracy Initiative, employees and citizens who live in urban and rural
areas surrounding the company's farms and factories are taught to
read and write. To date, møre than 600 people have advanced under
this programme. More than 4,000 employees have prospered under
the Continuing Education programme. And in a given year, approxi-
mately 30 employees are able to attend college or pursue advanced
technical training, directly due to financial assistance from the com-
pany. Furthermore, General Cigar Dominicana provides financial sup-
port to four economically-challenged Dominican schools.
GSR IN ACTION 2
STG LUMMEN REDUCES ENERGY CONSUMPTION
STG Lummen, Belgium, is a recent recipient of the Charter Environ-
ment 2013 certificate, which is given to companies that perform
above and beyond the legislative requirements for environment,
health and safety. The factory continuously works on rationalising
its energy consumption and reducing water consumption. This ef-
fortindudes roof insulation, occupancy sensors that control lighting,
automatically switching off compressed air atthe end of a shift, heat
recuperation, solar panels and water recycdling.
TØR DGA gØr 2
MORE THAN 35,000 TREES REPLACED IN THE DOMINICAN
REPUBLIC AND HONDURAS
Protecting the environment and preventing pollution are vital ele-
ments of our commitment to tobacco cultivation. Perhaps the only
cigar manufacturer to have its own reforestation programme, we
replenish cedar and mahogany trees to replace those that are de-
pleted in making our cigar boxes. Each of our farms in the Dominican
Republic and Honduras participates in the reforestation activities,
which are now part of our standard agricultural operations. To date,
more than 35,000 trees have been replanted.
ile
BE.G 0.)
WE COMPOST TOBACCO WASTE AND
REDUCE GREENHOUSE GASES
Our STG Lummen factory in Belgium composts 77% of its tobacco
waste by giving it to a local recycling organisation. For farmers, to-
bacco waste presents an alternative to inorganic fertiliser. Tobacco
that decomposes in landfills is a cause of methane that causes climate
change, while waste turned into compost is a humus-like soil product
that returns vital plant nutrition to the soil.
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/41
WE REDUCE NOISE IN PRODUCTION AREAS BY 50%
Our factory in Holstebro, Denmark has significantly reduced noise
emissions from its machines. The 50% reduction was achieved by
mapping the noisiest zones and machines and then by mounting
noise-suppressing materials on the machines and hanging noise-
reduction panels from ceilings and on the walls. This is an effective
alternative to isolating the machines, which reduces productivity
and causes inconvenience for operators. With less noise, employees
experience a more pleasant working environment and although we
still recommend the use of ear-protectors in this part of the factory,
they are no longer obligatory.
DENMARK
1404044EogSN71209
THE BATTLE AGAINST CHILD LABOUR IN TANZANIA
Through the ECLT Foundation (Eliminating Child Labour in Tobacco
Growing), we contribute to various projects that create a better life
for children in tobacco growing countries. In Tanzania, ECLT funds one
such project, PROSPER (Promoting Sustainable Practices to Eradicate
Child Labour in Tobacco). '
TANZANIA
Agriculture, the largest sector for child labour worldwide, is a major
source of income for Tanzania, and tobacco is one of the country's
largest export crops. Tanzania's tobacco-producing areas tend to have
low primary school enrolment and high numbers of working children
aged from five to 17. '
The project identiftes resources in the local communities which can
enable the prevention of child labour and the withdrawal of children
from it: Among other benefits, PROSPER improves access to educa-
tion by providing scholarships for uniforms, books and school sup-
plies; it also provides microlcans to mothers, and basic social services
such as health, water and sanitation to communities and schools. The
advocacy element includes creating awareness of children's rights
and of occupationa! safety and health standards for children of legal
working age, i.e. between 15 and 17.
The project is expected to provide financial support to 1,800 families,
helping them to pursue alternative forms of income and send their
children to school. The aim is to raise the awareness of 20,000 people
of the hazards of child labour and of children's rights to safety and
education. The project was launched in 2011 and runs through 2015.
Read more about the ECLT Foundation on www.eclt.org.
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ETEREGHS HELE EEN
EXECUTIVE
MANAGEMENT
Craig Reynolds (1955)
President, Cigars
International
Craig has been with
Cigars International
since 2009. He was
Executive Vice President
from 2009 to 2010 and
became President of
Cigars International
in2011.
Christian Hother
Sørensen (1964)
Executive Vice
President
Christian joined
Scandinavian Tobacco
Group in 2003. From
2003 to 2008 he held
positions as Sales and
Marketing Director,
Senior Vice President for
Exports and President
of House of Prince, He
has been Executive Vice
President for Sales and
Marketing since 2008,
Christian isalsoa
member of the board
of Toms Gruppen A/S
and amemberafthe
International Market
Policy Committee of
the Confederation of
Danish Industry.
Røbertus Adrianus
Zwarts (1955)
Executive Vice
President
Rob joined Swedish
Match in 1993. From
1993 to 2000, he held
positions as Vice
President Operations
and Presidentofthe
Swedish Match Cigar
Division. He joined
Scandinavian Tobacco
Group in 2002 as
President of Henri
Wintermans Cigars B.V.
and has been Executive
Vice President of Supply
Chain since 2008.
Rob is also a member of
the Advisory Board of
NDF Special Lighting.
Anders Colding Friis
(1963) Group CEO
Anders joined Scandina-
vian Tobacco Group in
1999. Until 2006, he was
Executive Vice Presi-
dentand Presidentof
House of Prince. He has
been CEO since 2006.
Anders is alsø chairman
of the board of Monberg
& Tharsen A/S, vice
chairman of the board
of IC Companys A/S and
a member of the board
of Topdanmark A/S.
Heisa member afthe
Executive Committee
and Central Board of
the Confederation of
Danish Industry.
" 1404044EogSN71215
Sisse Fjelsted
Rasmussen (1967)
Group CFO
Sisse has been with
Scandinavian Tobacco
Group since 2008. Sheis
responsible for Group
Finance, Group IT and
Group Communications.
She isalsø a board
member of PøstNørd
and a member of the
Tax Policy Committee
ofthe Confederation of
Danish Industry.
Dan Carr (1963)
President,
General Cigar
Dan has held various
management positions
withthe Group since
1996 when he joined
General Cigar. From
1999 to 2007 he was
Vice President of
Sales and Marketing
inSwedish Match's US
division. In 2007 he
returned to General
Cigaras Senior Vice
President for Sales and
Marketing. Since 2010
he has been President
of General Cigar.
Dan ischairman ofthe
Cigar Association of
America and a board
member of the Tobacco
Merchants Association.
Niels Frederiksen
(1964)
Executive Vice
President
Niels has been with
Scandinavian Tobacco
Group since 1999 in
various positions,
including Senior Vice
President and Executive
Vice President for
Group functions. Since
2013, hehasbeen
responsible for the
smoking tobacco supply
chain,the handmade
cigar business outside
the US, in co-operation
with General Cigar, and
strategic projects.
Charlotte Liickstadt Nielsen Hanne Malling Kurt Asmussen Lindy Larsen Fredrik Peyron Joakim Tilly
Elected by the employees Elected by the employees Elected by the employees Elected by the employees
SUPERVISORY
BOARD
Lars Dahigren Jørgen Tandrup
Chairman
1404044EogSN71216
Henning Kruse Petersen
Anders Obel
Conny Karlsson
Deputy Chairman
Tommy Pedersen
COMPANY
ADDRESSES
Scandinavian Tobacco Group A/S
ge Sydmarken 42
NY 2860 Soeborg
Denmark
Tel: +45 3955 6200
SCANDINAVIAN Mail: infoéest-group.com
TOBACCO GROUP www.st-group.com
General Cigar Co, Inc.
10900 Nuckols Road, Suite 100
Glen Allen, VA 23060
USA.
Tel: +1 804 935 2800
www.generalcigar.com
CLUBS AND
RETAIL STORES
UNITED STATES
CI Hamburg Super-Store
1635 Mountain Road
Hamburg, PA 19526
Tel: +1 610 562 0500
UNITED STATES
CI Bethlehem Super-Store
4078 Nazareth Pike
Bethlehem, PA 18020
Tel: +1 484 895 3933
UNITED STATES
CI Downtown Store
535 Main Street
Bethlehem, PA 18018
Tel: +1 610 419 2076
1404044EogSN71217
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /55
Cigars International, Inc.
1911 Spillman Dr
Bethlehem, PÅ 18015
USA.
Tel: +1 484 285 0400
www.cigarsinternational.com
UNITED STATES
Club Macanudo
26 E 63rd St
New York, NY 10065-8030
Tel: +1 212 752 8200
THE NETHERLANDS
P.G.C. Hajenius BV
Rokin 96
1012 KZ Amsterdam
Tel: +31 20 623 74 94
DENMARK
Davidoff My Own Blend
Silkegade 23
1113 Copenhagen K
Tel: +45 3314 0922
56 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
GROUP
FUNGTIONS
GROUP MARKETING
Lars Toft Wassberg
Senior Vice President
Rekha Grover
Marketing Director
INTERNATIONAL SALES
Jurjan Klep
Senior Vice President
Claus Chemnitz
Director
Jean-Louis Leppert
Director
Handmade Cigars
SUPPLY CHAIN
Jos Breemans
Senior Vice President
Bart Aarts
Senior Vice President
Jacob Bjerre
Senior Vice President
Thomas Lindegaard
Senior Vice President
Scientific and Regulatory Affairs
GROUP HR
Carla Leilani Packness
Senior Vice President
GROUP LEGAL & PUBLIC AFFAIRS
Mette Valentin
Senior Vice President
Pia Loft
Director
Public Affairs
GROUP IT
Knud Erik Foged
Senior Vice President
GROUP COMMUNICATIONS
Kaspar Bach Habersaat
Director
1404044EogSN71218
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/57
GROUP FINANCE
Andreas Morthorst-Jensen
Director
Group Accounting & Reporting
Morten Guldager
Director
Group Controlling
Jonas Frøkjær-Jensen
Director
Group Treasury
Jakob Berning
Director
Global Tax
58 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
SCANDINAVIAN TOBACCO GROUP
SALES COMPANIES
AUSTRALIA
Scandinavian Tobacco Group Australia Pty Ltd.
718 Princes Highway
Springvale, VIC 3171
Tel: +61 3 8558 9999
Managing Director: Tony Garda
BELGIUM/LUXEMBOURG
Scandinavian Tobacco Group Belux NV.
Dellestraat 12A
3560 Lummen
Tel: +32 1361 3280
Managing Director: Koen Bilcke
CANADA
Scandinavian Tobacco Group Canada Inc
1010 Rue de Serigny, Suite 710
Longueuil (Quebed), J4K 567
Tel: +1 450 677 1807
President: Sylvain Laporte
DENMARK
Scandinavian Tobacco Group Denmark A/S
Sydmarken 42
2860 Søborg
Tel: +45 4345 6766
Managing Director: John Lemkow
FRANCE
Scandinavian Tobacco Group France SAS.
Le Capitole
55 avenue des Champs Pierreux
92012 Nanterre Cedex
Tel: +33 1 55 17 72 50
Managing Director: Francois Sehpossian
GERMANY
Scandinavian Tobacco Group Deutschland GmbH
Hermann-RitterStraBe 106
28197 Bremen
Tel: +49 421 244160
Managing Director: Regis Broersma
ITALY
Scandinavian Tobacco Group Italy S.R.L
Via Paolo di Dono 149
00142 Rome
Tel: +39 06 515 30412
Managing Director: Paolo Butini
THE NETHERLANDS
Scandinavian Tobacco Group Nederland BM.
Nieuwstraat 75-77
5521 CB Eersel
Tel: +31 88 2085603
Managing Director: Tom Bodde
NEW ZEALAND
Scandinavian Tobacco Group New Zealand Ltd.
Level 1/18-26 Amelia Earhart Avenue
P.O. Box 201230, Airport Oaks 2151
Auckland Airport 2151
Tel: +64 800 442 866
Managing Director: Tony Garda
POLAND
Scandinavian Tobacco Group Polska Sp. z 0.0.
Marywilska 34
03-228 Warsaw Mazowieckie
Tel: +48 228 142 278
Managing Director: Slawomir Hirsz
PORTUGAL
Scandinavian Tobacco Group Portugal SA
Parque Suécia, Suécia IV — Piso 0, sala 0.10
2794-038 Carnaxide
Tel: +35 191 332 0900
Managing Director: Rute Rodriguez
SLOVENIA/CROATIA
Scandinavian Tobacco Group d.0.0.
Vojkova ulica 50
1000 Ljubljana
Tel: +386 1589 7080
Managing Director: Andrej Zaren
1404044EogSN71219
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/59
SPAIN
Scandinavian Tobacco Group Spain S.A.U.
Edifico Iris, calle Ribera del Loiran, n2 4-6, planta 32
28042 Madrid
Tel: +34 91 3816400
Managing Director: Juan Antonio Lucas
UNITED KINGDOM
Scandinavian Tobacco Group United Kingdom Limted
250 Centennial Park, Centennial Avenue
Elstree, Borehamwood
Herts WDG 3TH
Tel: +44 20 8731 3400
Managing Director: Huw Williams
UNITED STATES
Scandinavian Tobacco Group Lane Ltd.
2280 Mountain Industrial Boulevard
Tucker, GA 30084
Tel: +1 770 934 8540
President: Kelly Michols
60 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013
MANUFACTURING
SITES
BELGIUM
Scandinavian Tobacco Group Lummen NV.
Dellestraat 12A
3560 Lummen
Tel: +32 13 61 32 00
General Manager: Dirk Berré
DENMARK
Scandinavian Tobacco Group Assens A/S
Assens Factory:
Tobaksvej 1
5610 Assens
Tel: +45 6471 1032
Factory manager: Troels Mikkelsen
DENMARK
Scandinavian Tobacco Group Nykøbing ApS
Ndr. Ringvej 25
4800 Nykøbing Falster
Tel: +45 5485 3644
General Manager: Jan Nielsen
DENMARK
Scandinavian Tobacco Group Assens A/S
Holstebro Factory:
Herningvej 2
7500 Holstebro
Tel:+45 9611 9611
Factory Manager: Søren Ørskov
THE DOMINICAN REPUBLIC
General Cigar Dominicana S.A.
Zona Franca Industrial, Etapa I
Calle La Paloma, Esaq. Villa Gonzålez
Santiago
Tel: +1 809 226 2500
Vice President Operations: Jhonys Diaz
THE DOMINICAN REPUBLIC
Scandinavian Tobacco Group Moca, SA.
Zona Franca Industrial
Apartado Postal 178
Moca
Tel: +1 809 578 7201
General Manager: Henry Caballero
1404044EogSN71220
HONDURAS
Honduras American Tabaco, SA de CV. (HATSA)
Barrio el Quiquisque, Carretera a El Parafso
Contiguo a la Escuela Normal Espana y frente al
Instituto Pedro Nufio, Danli, El Paraiso
Tel: +504 763 6674
General Manager: Edwin Ariel Guevara
INDONESIA
P.T. Scandinavian Tobacco Group Indonesia
Jil. Stadion 28
Pandaan 67156
Tel: +62 343 631336, 631158, 631159
General Manager: Stefaan Vancolen
P.T. Scandinavian Tobacco Group Indonesia
Jl. Rembang Industri II/16
Pasuruan Industrial
Estate Rembang
Tel: +62 343 740274, 740275
General Manager: Stefaan Vancolen
SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 61
THE NETHERLANDS
Scandinavian Tobacco Group Eersel BV.
Nieuwstraat 75-77
5521 CB Eersel
Tel: +31 497 58 1911
Factory Manager: Ingrid Habraken
NICARAGUA
Scandinavian Tobacco Group Esteli, S.A.
Km 145 Carretera Panamericana
Esteli
Tel: +505 2713 6228
Factory Manager: Hector Vanegas
UNITED STATES
Scandinavian Tobacco Group Lane Ltd.
2280 Mountain Industrial Boulevard
Tucker, GA 30084
Tel: +1 770 934-8540
President: Kelly Michols
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1404044EogSN71223
66 ; SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT AND
STATEMENT OF COMPREHENSIVE INCOME
ANG AJEY 37 DELER BEN
UDNSULIDATED MUN STA FOÆNT
DKK million Note 2013 2012
Net sales 2.1 5,9253 5,978.0
Cost of goeds sold 2.1 -3,010.8 -2,986.5
Gross profit 2.1 2,914.5 2,991,5
Other external costs -1,108.4 -1,066.5
Staff costs 2.2 -631.8 -623.8
Other income 03 0.1
Earnings before interest, tax, depreciation and amortisation (EBITDA) 1,174.6 1,301.3
Depreciation and impairment 3.2 -128.8 -125.0
Earnings beføre interest, tax and amortisation (EBITA) 1,045.8 1,176.3
Amortisation and impairment 3.1 -271.1 -244.9
Earnings before interest and tax (EBIT) 774.7 931.4
Share of profit of associated companies, net of tax 44 54 11.9
Financial income 4.5 5.7 54
Financial costs 4.5 -110.1 -106.1
Profit before tax 675.7 842.6
Income taxes 2.3 -102.9 -224.4
Net profit fortheyear 572.8 618.2
items that will not be recydled subsequently to the Consolidated Income Statement:
Actuarial gains and losses on pension obligations 15.1 -53.4
Tax of actuarial gains and losses on pension obligations -6.0 142
Items that will be recydled subsequently to the Consolidated Income Statement,
when specific conditions are met:
Cash flow hedges, realisation of previously deferred (gains)/lasses tø financial items 35.0 37.0
Cash flow hedges, realisation of previously deferred (gains)/losses to net sales -15.8 20.3
and cost of goods sold
Cash flow hedges, deferred gains/(losses) incurred during the year 19.7 -121.4
Tax of hedging instruments -9.7 16.0
Foreign exchange rate adjustments -291.2 -30.3
Other comprehensive income for the year, net oftax -252.9 -117.6
Total comprehensive income forthe year 319.9 500.6
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /67
ASSETS
DKK million Note 2013 2012
NON-CURRENT ASSETS
INTANGIBLE ASSETS
Goodwill 3,874,5 3,974.4
Trademarks 3,133.7 3,404.6
Other intangible assets 370,8 412.7
Total intangible assets 31 7,379.0 7,791.7
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 565.0 579.7
Plantand machinery 247.7 2546
Equipment, tools and fixtures 69.9 64.4
Leasehold improvements 36.4 29.5
Construction in progress 192.7 63.2
Total property, plant and equipment 3.2 1,111.7 991.4
OTHER NON-CURRENT ASSETS
Investments in associated companies 44 97.5 104.7
Deferred income tax assets 23 82.6 88.7
Other financial fixed assets 44 0.7 0.8
Total other non-current assets 180.8 194.2
Total non-current assets 8,671.5 8,9773
Inventories 33 2,926.9 2,780.7
RECEJVABLES
Trade receivables 3.4 917.1 971,8
Receivables from affiliated companies 16 37.5
Other receivables 100.5 119.6
Prepaid tax 2,3 1725 110.6
Prepayments 35 41.4 53.8
Total receivables 1,133.1 1,293.3
Cash and cash equivalents 464,3 684.2
Total current assets 4,524,3 4,758.2
Total assets 13,195.8 13,735.5
1404044EogSN71224
68 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER
FJULTY ANG DTARUGIJES
DKK million Note 2013 2012
Share capital 100.0 100.0
Reserve for hedging -63.1 -92.3
Reserve for currency translation -58.4 232.8
Retained earnings 83543 8,184.4
Total equity 8,332.8 8,424.9
Bank loans 41 2,756.5 3,008.9
Deferred income tax liabilities 2,3 519.3 582.2
Pension obligations 3.7 209.5 217.0
Other provisions 3.6 45.5 96.6
Other liabilities 56.9 85.7
Total non-current liabilities 3,587.7 3,990.4
Bank foans 4.1 2219 232.0
Trade payables 359.9 352.6
Corporate tax liabilities 23 170.9 148.2
Other provisions 3.6 41.2 32.7
Other liabilities 481.4 554,7
Total current liabilities 1,275,3 1,320.2
Total liabilities 4,863.0 5,310.6
Total equity and liabilities 13,195.8 13,735.5
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /69
STATEMENT OF CHANGES IN GROUP EQUITY
1 JANUARY - 31 DECEMBER 2013
Reserve
Reserve for
Share far currency Retained
DKK million capital hedging translation earnings Total
Equity at 1 January 2013 100.0 92.3 232.8 8,184.4 8,424.9
Comprehensive income for the year
Net profit forthe year 0.0 0.0 0.0 572.8 572.8
Other comprehensive income
Cash flow hedges 38.9 38.9
Tax of cash flow hedges -9.7 -9.7
Foreign exchange adjustments -291,2 -291.2
Actuarial gains and losses on pension obligations 15.1 15.1
Tax of actuarial gains and løsses on pension obligations -6.0 6.0
Total other comprehensive income 0.0 29.2 -291.2 9.1 -252.9
Total comprehensive income for the year 0.0 29.2 -291.2 581.9 319.9
Transactions with shareholders
Dividend paid -412.0 -412.0
Total transactions with shareholders 0.0 0.0 0.0 -412.0 -412.0
Equity at 31 December 2013 100.0 -63.1 -58.4 8,354,3 8,332.8
Retained earnings include proposed dividends of DKK 382.0 million. Propøsed dividend per share amounts to DKK 3.8. Dividend paid in 2013
consisted of dividend in respect of 2012 of DKK 412,0 million (dividend paid per share amounted to DKK 4.1).
The share capital consists of 100,000,000 shares of a nominal value of DKK 1. No shares carry any special rights.
1404044EogSN71225
70 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN GROUP EQUITY
iCÅMUARY BH DELEMBER ØR"
Reserve
Reserve før
Share for currency Retained
DKK million capital hedging translation earnings Total
Equity at 1 January 2012 100.0 -44.2 263.1 7,955.4 8,274.3
Comprehensive income for the year
Net profit forthe year 0.0 0.0 0.0 618.2 618.2
Other comprehensive income
Cash flow hedges 64.1 641
Tax of cash flow hedges 16.0 16.0
Foreign exchange adjustments -30.3 -30.3
Actuarial gains and losses on pension obligations -53.4 53.4
Tax of actuarial gains and losses on pension obligations 14,2 14.2
Total other comprehensive income 0.0 48.1 30.3 -39.2 -117.6
Total comprehensive income for the year 0.0 -48.1 -30.3 579.0 500.6
Transactions with shareholders
Dividend paid -350.0 -350.0
Total transactiøns with shareholders 0.0 0.0 0.0 -350.0 -350.0
Equity at 31 December 2012 100.0 -92.3 232.8 8,184.4 8,424.9
Retained earnings include proposed dividends of DKK 412.0 million. Proposed dividend per share amøunts to DKK 4.1. Dividend paid in 2012
consisted of dividend in respect of 2011 of DKK 350.0 million (dividend paid per share amounted to DKK 3.5).
The share capital consists of 100,000,000 shares of a nominal value of. DKK 1. No shares carry any special rights. There has been no changes in the
share capital in the period 1 October 2010 to 31 December 2011.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /71
CONSOLIDATED CASH FLOW STATEMENT
1 JAMUARY - 31 DECEMBER
DKK million Note 2013 2012
Net profit for the year 572,8 618.2
Adjustments 5.1 601,8 683.1
Changes in working capital 43 -118.5 -360.6
Cash flow from operating activities before financial items 1,056.1 940.7
Financial income received 45 5,7 54
Financial costs paid 45 -110,1 -106.1
Cash flow from operating activities before tax 951.7 840.0
Tax payments 2.3 -210.0 -123.6
Cash flow from operating activities 741.7 716.4
Acquisition of intangible assets 3.1 -47.9 -253.7
Acquisition of property, plant and equipment 3.2 -2711 -138.4
Dividend from associated company 4.4 44 3.9
Cash flow from investing activities -314.6 -388.2
Instalment bank loan -235.0 -245.7
Dividend payment -412.0 -350.0
Cash flow from financing activities -647.0 -595.7
Net cash flow forthe year -219.9 -267.5
Cash and cash equivalents at 1 January 6842 951.7
Net cash flow for the year -219.9 -267.5
Cash and cash equivalents at 31 December 4643 684.2
1404044EogSN71226
721 SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
NOTES
The notes are divided into different sections. The disclosures are structured to provide full transparency in the discdlosed amounts,
describing the relevant accounting policy, key accounting estimates and numerical disclosure for each note.
SECTION 1 'BASIS OF PREPARATION'
Introduces the Groups financial accounting policies in general and an overview of Management's key accounting estimates.
11 Summary of significant accounting policies p73
1.2. Other accounting policies p74
13 Other general accounting policies p75
SECTION 2 'RESULTS FOR THE YEAR'
Comprises the notes related to the result for the year including segment information, taxes and staff costs.
21 Gross profit (net sales and cost of goods sold) p76
2.2 Staff costs p 79
23. Income and deferred income taxes p80
SECTION 3 'OPERATING ASSETS AND LIABILITIES'
Relates to the assets that form the basis for the activities of the Group and the related liabilities.
31 Intangible assets p 82
3.2. Property, plant and equipment p 84
33 Inventories p 86
3.4 Trade receivables p 87
35 Prepayments p 88
3.6 Other provisions p88
37 Pension obligations p 89
SECTION 4 'CAPITAL STRUCTURE AND FINANCING ITEMS'
Encompasses notes related to capital structure and financing items.
41 Financial institutions p93
42 Financial risks and instruments p94
43. Changes in working capital p98
44 Financial fixed assets p99
45 Financdal income and costs p 101
SECTION 5 'OTHER DISCLOSURES'
Includes other statutory notes and notes of secondary importance from the perspective of the Group.
5.1 Cash flow adjustments p 102
52. Contingent liabilities p 102
53 … Related-party transactions p 103
5.4 Events after the reporting period p 104
55 Fee to statutory auditor p 104
5.6 Entities in Scandinavian Tobacco Group p 105
57 Explanation of financial ratios p 107
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /73
SECTION 1
BASIS OF PREPARATION OF THE CONSOLIDATED
FINANCIAL STATEMENTS
Scandinavian Tobacco Group presents its Consolidated Financial Statements on the basis of the latest developments in inter-
national financial reporting, and the Group strives for early adoption of EU endørsed IFRS accounting standards. All affiliated
companies within the Group follow the same Group accounting policies. This section describes the significant accounting policies
and other accounting policies in general, including Managemenf's key accounting estimates and the new IFRS requirements.
A detailed description of accounting policies and key accounting estimates related to specific reported amounts is presented
in the note to the relevant financial item.
NOTE 1.1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Consolidated Financial Statements of Scandinavian Tobacco
Group have been prepared in accordance with the International
Financial Reporting Standards (IFRS), as adopted by the Euro-
pean Union (EU) and additional Danish disdosure requirements.
RECOGNITION AND MEASUREMENT
The Consolidated Financial Statements have been prepared un-
der the historical cost basis except when IFRS explicitly requires
the use of fair value.
The functional currency of the Parent Company is Danish kroner
and this is also the presentation currency of the Group.
The principa! accounting policies set out below have been ap-
plied consistently in the preparation of the Consolidated Finan-
cial Statements for all the years presented (except for financial
highlights for the period 1 October to 31 December 2010 which
have not been restated as part of the transition to IFRS in 2012).
PRINCIPAL ACCOUNTING POLICIES
The Group's accounting policies are described in relation to the
individualnotestothe Consolidated Financial Statements. Con-
sidering all the accounting policies applied in the preparation
ofthe Consolidated Financial Statements, Management regards
the following as the most significant accounting policies forthe
recognition and measurement of reported amounts as well as
relevant to an understanding of the Consolidated Financial
Statements:
= Netsales (note 2.1)
= Income taxes (note 2.3)
= Intangible assets and property, plant and equipment includ-
ing impairment (notes 3.1 and 3.2)
= Inventories (note 3.3)
m Tradereceivables and allowances for doubtfultradereceiva-
bles (note 3.4)
1404044EogSN71227
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
In preparing the Group's Consolidated Financial Statements,
Management makes various accounting estimates, judgments
and assumptions which form the basis of presentation, recogni-
tion and measurement of the Group's assets and liabilities.
Accounting estimates and underlying assumptions are reviewed
on an ongoing basis. In some circumstances a change in the es-
timates may be necessary because of changes in the underlying
assumptions.
ESTIMATION UNCERTAINTY
Determining the carrying amount of some assets and liabilities
requires judgments, estimates and assumptions concerning fu-
ture events.
The judgments, estimates and assumptions made are based on
historical experience and other factors which Management as-
sesses to be reliable, but which by their very nature are associ-
ated with uncertainty and unpredictability. These assumptions
may prove incomplete or incorrect, and unexpected events or
circumstances may arise.
The Group is also subject to risks and uncertainties which may
lead to actual results differing from these estimates, both posi-
tively and negatively. Assumptions about the future and esti-
mation uncertainty on the balance sheet date are described in
the notes where there is a significant risk of changes that could
result in material adjustments to the carrying amount of assets
or liabilities within the next financial year.
Management regards the following areas to include the key ac-
counting estimates and assumptions used in the preparation of
the Consolidated Financial Statements:
Goodwill (note 3.1)
Trademarks (note 3.1)
Inventories (note 3.3)
Pension obligations (note 3.7)
Please refer to the specific notes for further information on the
key accounting estimates and assumptions applied.
74 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /FINANCIAL STATEMENTS
MOTE L?
OTHER ACCOUNTING POLICIES
While preparing the Consolidated financial statements of the
Group for the period ended 31 December 2013, Management
identified a prior period accounting error which must be ac-
counted for retrospectively in the financial statements in ac
cordance with IFRS 3 and IAS 8. Consequently, comparative
amounts presented in the current period's financial statements
affected by the accounting error, have been adjusted, Current
period amounts are therefore unaffected.
The prior period accounting error is related to deferred income
tax liabilities in the opening balances as of 1 October 2010
which has been overstated with an amount of USD 17 million
converted at the year-end USD/DKK exchange rate in each of
the affected years.
The amount has been corrected in each period between de-
ferred income tax liabilities and goodwill in the balance sheet
and has no effect on the Group's income statement or equity.
Impact in DKK in each of the affected comparison periods is
listed in the table below:
2011 2012
Previous Error Adjusted Previous Error Adjusted
DKK million dj adjustment amount
Goodwill 4,130.0 -97.7 4,032.3 4,070.6 -96.2 3,974.4
Deferred income tax liability 657.6 -97.7 559.9 678.4 -96.2 582.2
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
IMPACT OF NEW ACCOUNTING STANDARDS
In2013,the followingstandardsand amendmentswithrelevance
for the Group were brought into effect and implemented:
Amendments to IAS 19 'Employee Benefits"
Amendments to IAS 28 'Investments in Associates and Joint
Ventures'
Amendments to IFRS 7 Disclosures — Offsetting Financial
Assets and Financial Liabilities
= |FRS 12 "Disclosure of Interests in Other Entities'
= |FRS 13 'Fair Value Measurement'
None of these have had a significant impact on recognition and
measurement, but they have led to further specifications in the
notes. The Group does not anticipate any significant impact on
future periods from the adoption of these new standards and
amendments.
EARLY ADOPTION OF THE NEW OR AMENDED IFRS
The Group has early adopted the amendmentto IAS 36'Recover-
able Amount Disclosures for Non-Financial Assets', effective for
annual periods beginning on or after 1 January 2014.
NEW OR AMENDED IFRS THAT HAVE BEEN ISSUED BUT
HAVE NOT YET COME INTO EFFECT AND HAVE NOT BEEN
EARLY ADOPTED
In addition to the above, IASB has issued a number of new or
amended and revised accounting standards and interpretations
that have not yet come into effect. The following are the most
significant:
= [ASB has issued IFRS 9 'Financial Instruments', which is ap-
plicable to reporting periods starting on or after 1 January
2015. It is part of the IASB project to replace !AS 39, and the
new standard will substantially change the classification
and measurement of financial instruments and hedging re-
quirements. The new standards and the amendment have
not yet been endorsed by the European Union. The Group
has assessed the impact of the standard and determined
that, in its current wording, it will not have any significant
impact on the Consolidated Financial Statements.
IASB has issued re-exposure drafts on IAS 18 'Revenue' and
JAS 17 'Leasing”. The revised IAS 18 is expected to have only
immaterial impact on the Consolidated Financial State-
ments. Thechange in lease accountingisexpected torequire
capitalisation of the majority of the Group's lease contracts,
which will have some impacton the Group's assets, liabilities
and financial ratios, but no significant impact on net profit.
However, the final impact may change depending on the
final wording of the standards.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /75
NOTE 1.3
OTHER GENERAL ACCOUNTING
POLICIES
BASIS OF CONSOLIDATION
The Consolidated Financial! Statements comprise the Parent
Company, Scandinavian Tobacco Group A/S, and subsidiaries
in which the Parent Company directly or indirectly holds more
than 50% of the votes or in which the Parent Company, through
share ownership or otherwise, exercises control. Enterprises in
which the Group holds between 20% and 50% of the votes and
exercises significant influence but not control are classified as as-
sociated companies. At consolidation, items of a uniform nature
are combined, Elimination is made of intercompany income and
expenses, shareholdings, dividends and accounts as well as of re-
alised and unrealised profits and losses on transactions between
the consolidated enterprises.
The Parent Company's investments in the consolidated subsidi-
aries are set off against the Parent Company's share of the net
asset value of subsidiaries stated at the time of consolidation.
On the acquisition of subsidiaries, the difference between cost
and net asset value of the enterprise acquired is determined
at the date of acquisition after the individual assets and liabili-
ties have been adjusted to fair value (the purchase method).
Transaction costs relating to the acquisition of subsidiaries are
not induded in the value of the acquired assets. All acquisition-
related costs are expensed in the period they incur. Any remain-
ing positive differences are recognised in intangible assets in
the balance sheet as goodwill. Goodwill is not amortised, but
instead tested for impairment on an annual basis and when
there is an indication of impairment. Any remaining negative
differences (negative goodwill) are recognised as income in the
income statement at the time of acquisition. Amounts attribut-
able to expected losses or expenses are recognised as income in
the income statement as the affairs and conditions to which the
amounts relate materialise.
Positive and negative differences from enterprises acquired
may, due to changes to the recognition and measurement of
net assets, be adjusted until one year from the acquisition date.
These adjustments are also reflected in the value of goodwill or
negative goodwill.
TRANSLATION POLICIES
Transactions in foreign currencies are translated at the exchange
rates at the dates of transaction. Gains and losses arising due to
differences between the transaction date rates and the rates at
the dates of payment are recognised in financial income and
expenses in the income statement
Receivables, payables and other monetary items in foreign cur-
”rencies that have not been settled at the balance sheet date are
translated at the exchange rates at the balance sheet date. Any
differences between the exchange rates at the balance sheet
date and the transaction date rates are recognised in financial
1404044EogSN71228
income and expenses in the income statement, see the section
on hedge accounting.
Income statements of foreign subsidiaries and associated com-
panies are translated at transaction date rates or approximated
average exchange rates. Balance sheet items are translated at the
exchange rates at the balance sheet date. Exchange adjustments
arisingon thetranslation of the opening equity and exchange ad-
justments arising from the translation of the income statements
at the exchange rates at the balance sheet date are recognised
directly in equity.
OTHER EXTERNAL COSTS
Other external costs comprise expenses for premises, sales, mar-
keting and distribution as well as office expenses, fee to statutory
auditør etc.
EQUITY
Proposed dividend is recognised as a liability at the time of ap-
proval by the general meeting. Dividend which is expected to be
distributed for the year is disclosed in the statement of changes
in Group equity.
Thereserve for currency translation inthe Consolidated Financial
Statements comprises foreign exchange differences arising from
translation of financial statements of foreign enterprises from
their functional currencies to the presentation currency of the
Group (Danish kroner). On full or partial realisation of the net
investment the foreign exchange adjustments are recognised in
the income statement.
CASH FLOW STATEMENT
The cash flow statement shows the Group's cash flows for the
year brøken down by operating, investing and financing activi-
ties, changes for the year in cash and cash equivalents as well
as the Group's cash and cash equivalents at the beginning and
end of the year.
Cash flow from operating activitiesis calculated as the net profit/
loss for the year adjusted for changes in working capital and non-
cash operating items such as depreciation, amortisation and im-
pairment losses, and provisions. Working capital comprises current
assets less short-term debt excluding items included in cash and
cash equivalents, prepaid tax and corporate tax liabilities.
Cash flow from investing activities comprises cash flows from
acquisitions and disposals of intangible assets, property, plant
and equipment as well as fixed asset investments.
Cash flow from financing activities comprises cash flows from
the raising and repayment of long-term debt as well as payments
to and from shareholders.
Cash and cash equivalents comprise "Cash at bank and in hand".
The cash flow statement cannot be derived directly from the
published financial records.
76 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /FINANCIAL STATEMENTS
sk JOIN
RESULTS FOR THE YEAR
This section comprises notes in relation to the results for the year, including disclosure on product segments. The Financial
Highlights on page 11 gives a detailed description of the results for the year.
NoqE21
GROSS PROFIT (NET SALES AND
COST OF GOODS SOLD)
ACCOUNTING POLICIES
NET SALES
Revenue from the sale of goods is measured at the fair value of
the consideration received or receivable. Revenue is recognised
exclusive of VAT, excise stamps and net of discounts relating to
sales.
Revenue from the sale of goods is recognised inthe income state-
ment when the following conditions are met:
= The Group has transferred the significant risks and rewards
of ownership of the goods to the buyer.
m= The amount of revenue can be measured reliably.
= |tis possible thatthe economic benefits associated with the
transaction will flow to the entity.
COST OF GOODS SOLD
Cost of goods sold comprises costs incurred to achieve revenue
for the year. Cost comprises raw materials, consumables, direct
labour costs and indirect production costs such as maintenance
etc. as well as operation, administration and management of
factories.
SEGMENT REPORTING
The Group operates in five different segments: Handmade ci-
gars, machine-made cigars, pipe tobacco, fine-cut tobacco and
other.
The 'handmade cigars' segment indludes sales of handmade
cigars (own and 3Ird party) and license income.
The 'machine-made cigars' segment includes sales of machine-
made cigars (own and 3rd party), little cigars (own and 3rd
party) and license income.
The 'pipe tobacco" segment includes sales of pipe tobacco (own
and 3rd party) and license income.
The 'fine-cut tobacco" segment includes sales of fine-cut tobacco
(own and 3rd party) and license income.
The 'other' segment includes sales of other tobacco, contract
manufacturing (CMA) tobacco, CMA cigars, fire produdts, tubes/
paper, other products and license income.
The segment allocation has been based on the intemal man-
agement reporting.
There has been no material transactions between the differ-
ent segments.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /77
SEGMENT INFORMATION
2013 Hand- Machine-
made made Pipe Fine-cut Not
DKK million cigars cigars tobacco tobacco Other allocated Total
Net sales 1,368.1 2,512.9 566,9 5218 955,6 0.0 5,925.3
Cost of goods sold -765.1 -1,150.5 -233.7 -248.1 -613.4 0.0 -3,010.8
Gross profit 603.0 1,362.4 333.2 273.7 342.2 0.0 2,914.5
Other external costs -1,108.4 -1,108.4
Staff costs -631.8 -631.8
Other income 0.3 03
EBITDA -1,739.9 1,174.6
Depreciation and impairment -128.8 -128.8
Amortisation and impairment -271.1 -271.1
EBIT -2,139.8 774.7
Share of profit of associated
companies, net of tax 54 54
Financial income 57 5.7
Financial costs -110.1 -110.1
Profit before tax -2,238.8 675.7
Goodwill allocated to segments 1,372.4 707.7 6145 270.1 909.8 0.0 3,8745
2012 Hand- — Machine-
made made Pipe Fine-cut Not
DKK million cigars cigars tobacco tobacco Other allocated Total
Net sales 1,378.4 2,592.5 549,1 491.1 966.9 0.0 5,978.0
Cost of goods sold -741.7 -1,166.8 -214.8 -229.2 -634,1 0.0 -2,986.5
Grøss profit 636.7 1,425.8 334.3 261.9 332.8 0.0 2,991.5
Other external costs -1,066.5 -1,066.5
Staff casts -623.8 -623.8
Other income 0.1 0.1
EBITDA -1,690.2 1,301.3
Depreciation and impairment -125.0 -125.0
Amortisation and impairment -244,9 -244.9
EBIT -2,060.1 931.4
Share of profit of associated
companies, net of tax 11,9 119
Financial income 5,4 5.4
Financial cøsts -106.1 -106.1
Profit before tax -2,148.9 8B42.6
Goodwill allocated to segments 1,454.6 718.8 617.8 2723 910.9 0.0 3,974.4
1404044EogSN71229
78 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /FINANCIAL STATEMENTS
SEGMENT INFORMATION (CONTINUED)
DKK million 2013 2012
Geographic information
In the table below, sales to external customers are attributable to the country of the customers domicile. External sales are distributed per geo-
graphic region as follows:
North America 2,2483 2,251.0
Northern Europe 876.1 880.9
Western Europe 1,356.6 1,560,1
Southern Europe 3745 355.1
Oceania 413.8 3506
Rest of world 656.0 5803
Total net sales 5,925.3 5,978.0
The Group is domiciled in Denmark. Net sales from external customers in Denmark amount to DKK 230.0 million (DKK 241.2 million), and net
sales from external customers outside Denmark amount to DKK 5,695.3 million (DKK 5,736.8 million). Individual material countries (>10% of
total net sales) are the US DKK 1,977.4 million (DKK 1,991.2 million) and France DKK 623.1 million (DKK 741.8 million).
Information about major customers
Net sales of DKK 569.6 million (DKK 675.7 million) are derived from a single external customer and are attributable to different product seg-
ments, but primarily the machine-made cigar segment with 97% (98%).
License income of DKK 46.3 million (DKK 40.9 million) is included in the total net sales.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /79
NOTE 2.2
STAFF COSTS
ACCOUNTING POLICIES
Staff costs comprise wages and salaries as well as payroll expenses other than production wages.
DKK million 2013 2012
Wages and salaries 1,085.4 1,099.1
Pensions — defined contribution plans 42.1 33.0
Pensions — defined benefit plans 22.6 16.8
Other social security costs 169.8 144.1
Total staff costs forthe year 1,319.9 1,293.0
Staff costs included in intangible assets and property, plant and equipment -1.9 -8.1
Change in employee costs indluded in inventories -36 -9.7
Tatal staff costs expensed to the income statement 1,314.4 1,275.2
Included in the income statement:
Cost of goods sold 682.6 651.4
Staff cøsts 6318 623.8
Total included inthe income statement 1,314.4 1,275.2
Salaries and fees to the Supervisory and Executive Board in the parent
company can be specified as follows:
Supervisory Board 4.9 4.4
Executive Board, salaries and other short-term benefits 23.4 27.5
Executive Board, pensions 3.4 2.7
Executive Board, share option programme 41 0.0
Total Executive Board 30.9 30.2
Total Supervisøry Board and Executive Board 35.8 34.6
Average number of employees in the Group 9,510 9,472
Niels Frederiksen joined the Executive Board as of 1 April, 2013 and from this date his remuneration is
induded in the total amount of the Executive Board.
Members of the Executive Board are entitled to an early retirement pension plan. The increase in the pension commitment is included in the
above pension cost with DKK 3.4 million (DKK 2,7 million).
Members of the Executive Board have in total been granted 776,250 share options in 2012 entitling them to payment based on the created
economic value in the case of certain events. The programme is structured in A and B-options with a weighted average exercise price af DKK
74, The programme can be settled in cash or shares and expires on 31 December 2021. None of the granted options are exercisable at 31
December 2013 and the outstanding options have exercise prices between DKK 1 and DKK 100 per share. There have been no changes in the
programme and no triggering events during the year.
Theprogrammeisrecognised as a liabilityoverthe expected vesting period based onthe numberof optionsgranted,theestimated prob-
ability ofa trigger eventand the expected vesting period. The value of the programme is subjectto uncertaintyduetothetimingand:
probability of any events. The value is estimated to DKK 4.1m (DKK Om) at 31 December 2013. The valuation of the options is based on the
following assumptions; estimated vesting period, exercise price of DKK 74, estimated share price and estimated probability of a triggering
event.
1404044EogSN71230
80 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
AHole 2 Y
INCOME AND DEFERRED
INCOME TAXES
ACCOUNTING POLICIES
INCOME TAXES
Tax for the year consists of current tax for the year and deferred
tax for the year. The tax attributable to the profit for the year is
recognised in the income statement, whereas the tax attributable
to other comprehensive income is recognised directly in other
comprehensive income.
Any changes in deferred tax due to changes in tax rates are
recognised in the income statement or in other comprehensive
income depending on the original recognition.
DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax is recognised in respect of all temporary differences
between the carrying amount and the tax base of assets and
liabilities. However, deferred tax is not recognised in respect
of temporary differences concerning goodwill not deductible
for tax purposes and other items — apart from business acquisi-
tions — where temporary differences have arisen at the time
of acquisition without affecting the profit for the year or the
taxable income.
Deferred tax is measured on the basis of the tax rules and tax
rates that will be effective under the legislation at the balance
sheet date when the deferred tax is expected to crystallise as
current tax. In cases where the computation of the tax base
may be made according to alternative tax rules, deferred tax
is measured on the basis of the intended use of the asset and
settlement of the liability, respectively. Deferred tax assets,
including the tax base of tax loss carry-forwards, are measured
at the value at which the asset is expected to be realised, either
by elimination in tax on future earnings or by set-off against
deferred tax liabilities. Deferred tax assets and liabilities are
offset within the same fiscal tax unit.
CURRENT TAX RECEIVABLES AND LIABILITIES
Current tax receivables and liabilities are recognised in the bal-
ance sheetatthe amount calculated on the basis ofthe expected
taxable income for the year adjusted for tax on taxable incomes
for prior years. Tax receivables and liabilities are offset if there
is a legally enforceable right of set-off and an intention to settle
on a net basis or simultaneously.
DKK million 2013 2012
Tax expense
Current income tax -1724 -186.7
Change in deferred tax charge 53.8 -7.5
-118.6 -194.2
Tax is alløcated as follows:
Income taxes -102.9 "224,4
Tax on other comprehensive income related to hedging instruments -9.7 16.0
Tax on other comprehensive income related to actuarial gains and løsses on pension obligations -6.0 14.2
-118.6 -194.2
Income tax payable/receivable (net) - in the balance sheet
Prepaid tax 1725 110.6
Corporate tax liabilities 170.9 148.2
-1.6 37.6
Income tax payable (net):
Balance at 1 January 37.6 52
Currency adjustments -1.6 17
Prior-year tax adjustment 13 10.6
Tax paid on account in current year -200.6 -99.2
Received regarding previous years 33.6 58.9
Paid regarding previous years -43.0 -83.3
Current income tax 1711 176.11
Reclassification from deferred income tax 0.0 -32.4
Balance at 31 December -1.6 37.6
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /81
DKK million 2013 2012
Deferred tax (net) - in the balance sheet
Deferred income tax assets 82.6 88.7
Deferred income tax liabilities 5193 582.2
Deferred income tax liabilities (net) 436.7 493.5
Deferred tax (net)
Balance at 1 January 493,5 458.2
Currency adjustments -3.0 -4,6
Change in deferred tax charge -53.8 75
Reclassification to income tax 0.0 32.4
Balance at 31 December 436.7 493.5
Breakdown of deferred income tax liabilities (net):
Intangible assets 4749 564.3
Property, plant and equipment 235 32.5
Inventories -27.3 -37.8
Receivables -1.9 -1.0
Pensions -49.2 -47.0
Other liabilities -31.7 -29.9
Tax losses to be carried forward -6.4 -28.8
Other 548 412
436.7 493.5
Breakdown of tax on profit for the period:
Tax calculated at 25% of profit before tax -168.9 -210.6
Tax according to income statement -102.9 -224.4
66.0 -13.8
Tax effect of:
Non-deductible costs -7.7 -7.1
Income from associated companies 13 3.0
Non-taxable income 6.5 2.4
Prior year adjustments 110 -10.6
Other tax percentages 7.2 165
Effect of enacted change of tax rates 26.2 00
Other 21.5 -18.0
66.0 -13.8
No deferred tax liabilities are recognised for potential temporary differences associated with investments in subsidiaries and associated company.
The Group can normally control! the timing of the reversals of such temporary differences and none are probable in the foreseeable future.
At 31 December 2013 the Group has unrecognised tax assets amounting to DKK 42.9 million (DKK 0).
1404044EogSN71231
82 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
SEC THUN 3
OPERATING ASSETS AND LIABILITIES
This section specifies the operating assets that form the basis for the activities of the Group and the related liabilities.
MATE ST
INTANGIBLE ASSETS
ACCOUNTING POLICIES
Goodwill
Goodwill represents any cost in excess of identifiable net as-
sets, measured at fair value, in the acquired company. Goodwill
is valued at acquisition value less any accumulated impairment
losses. Goodwill is tested annually, or upon indication, for
impairment.
Trademarks
Trademarks are measured at cost less accumulated amortisa-
tion and less any accumulated impairment losses. Trademarks
are amortised on a straight-line basis over the estimated useful
life determined on the basis of Management! experience with
the individual trademarks. The amortisation period is typically
in the range 10-25 years.
Other intangible assets
Other intangible assets are measured at cost less accumulated
amortisation and less any accumulated impairment losses.
Amortisation is based on cost reduced by any residual value and
is calculated on a straight-line basis over the expected useful
lives of the assets, which are between 3-20 years.
KEY ACCOUNTING ESTIMATES
Impairment of intangible assets
The carrying amounts of intangible assets are reviewed on an
annual basis to determine whether there is any indication of
impairment other than that expressed by amortisation. If so,
an impairment test is carried out to determine whether the
recoverable amount is lower than the carrying amount and the
asset is written down to its lower recoverable amount.
The impairment tests include significant judgments made by
Management, such as assumption of projected future cash flows
used in the valuation of the intangible assets. Future events
could cause Management to conclude that impairment indica-
tors exist and that intangible assets are impaired. Any resulting
impairment loss could have a material impact on the financial
condition and result of operations.
Goodwill
In the annual impairment test of goodwill, an estimate is made
to determine how the enterprise will be able to generate suf-
ficient future positive net cash flows to support the value of
goodwill, trademarks and other net assets of the enterprise in
question. The estimate of the future net cash flows is based
upon Managements projections and anticipated future cash
flow based upon the strategy plan for the coming years, and
on projections for years following the strategy period, based
on general expectations and risks. The discount rates used to
calculate the recoverable amount reflect the risk-free interest
rate of the individual geographical regions and related risk. The
carrying value of goodwill amounted to DKK 3,8745 million
(DKK 3,974.4 million).
Trademarks
Acquired trademarks have been deemed to have definite useful
lives and are in general amortised over a period of 10-25 years.
Trademarks are tested for impairment when circumstances indi-
cate that the value of the trademarks is impaired. The carrying
value of trademarks amounted to DKK 3,133.7 million (DKK
3,404.6 million). Amortisation amounted to DKK 191.8 million
(DKK 191.1 million). During 2013, Management did not identify
any indications of impairment
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /83
INTANGIBLE ASSETS (CONTINUED)
2013
Other
intangible
DKK million Goodwill Trademarks assets Total
Accumulated cost at 1 January 2013 3,975,3 3,842.7 500,3 8,318.3
Exchange rate adjustment -99,9 -100.4 -3.3 -203.6
Addition 0.0 85 39.4 47.9
Disposal 0.0 0.0 -0.5 -0.5
Accumulated cost at 31 December 2013 3,875.4 3,750,8 535,9 8,162.1
Accumulated amortisation and impairment at 1 January 2013 0.9 438.1 87.6 526.6
Exchange rate adjustment 0.0 -12.8 -1,3 -14,1
Amortisation and impairment 0.0 191.8 793 271.1
Disposal 0.0 0.0 -0.5 -0.5
Accumulated amortisation and impairment at 31 December 2013 0.9 617.1 165,1 783.1
Carrying amount at 31 December 2013 3,874.5 3,133.7 370.8 7,379.0
2012
Other
intangible
DKK million Goodwill Trademarks assets Total
Accumulated cost at I January 2012 4,032.3 3,815.1 2211 8,068.5
Exchange rate adjustment -29.9 26.8 -0.8 -3.9
Redassification -27.4 0.8 26.6 0.0
Addition 0.3 0.0 253.4 253.7
Accumulated cost at 31 December 2012 3,975.3 3,842.7 500,3 8,318.3
Accumulated amortisation and impairment at 1 january 2012 0.0 230.8 35.6 266,4
Exchange rate adjustment 0.0 16.2 -0.9 15.3
Amortisation and impairment 0.9 191.1 52.9 244.9
Accumulated amortisation and impairment at 31 December 2012 0.9 438.1 87.6 526,6
Carrying amount at 31 December 2012 3,974,4 3,404.6 412.7 7,791.7
1404044EogSN71232
84 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
INTANGIBLE ASSETS (CONTINUED)
The goodwill within the Group is tested for impairment annu-
ally and whenever there is an indication of impairment. When
carrying out the impairment test, the Group is seen as several
cash generating units split according to the internal segment
reporting. The carrying values of the individual cash generating
units are compared to the values in use. If the carrying values
are higher, the difference is charged to the income statement.
The values in use are calculated using a valuation model based
on discounted expected future cash flows (DCF-model). The
cash flows used in the valuation model are based upon Man-
agement's projections and anticipated future cash flows based
upon the strategy plan for the coming years, after which a
terminal value is calculated. Terminal growth is conservatively
set to 0.8%. Management has used a discount rate (WACO of
8.0% (7.9%) for all segments except the pipe tobacco segment
where a discount rate of 8.3% has been applied. The discount
rates are based on the risk inherent in the related activity's
current business mødel and industry comparisons.
When goodwill was tested for impairment in 2013 (and 2012),
the value in use exceeded the carrying value for the Group. When
performing sensitivity analysis by increasing the discount rate by
1 percentage point, the value in use still exceeded the carrying
value per segment.
Trademarks
The main part of the Group's trademarks is attributable to
the merger between Scandinavian Tobacco Group and Swedish
Match in 2010 and the acquisition of Lane Ltd. in 2011. In con-
nection with the merger and the acquisition, intangible assets
were identified and measured at fair value at the date of the
merger/acquisition. The individual trademarks are amortised in
a straight line over the expected lifetime, The most significant
trademarks are listed below:
Remaining
amortisation Carrying amount
DKK million period 2013 2012
Captain Black, Bugter and Kite 17 years 681.33 755.1
Café Cråme 22 years 482,4 504.6
Tiedemanns 22 years 282.2 335.0
Mercator, Cuberro and Schimmelpenninck 14 years 216.8 248,8
La Paz 22 years 215.2 225.2
Other trademarks 1-22 years 1,255.8 1,335.9
Total 3,133.7 3,404.6
Other intangible assets
Other intangible assets comprise mainly IT software and acquired distribution rights.
Buildings 10-40 years
PROPERTY, PLANT AND EQUIPMENT Plant and machinery 3-20 years
Equipment, tools and fixtures 3-10 years
ACCOUNTING POLICIES Leasehold improvements 1-10 years
Property, plantand equipment are measured at cost less accumu-
lated depreciation and less any accumulated impairment losses.
Cost comprises the cost of acquisition and expenses directly
related to the acquisition up until the asset is ready for use.
In the case of assets of own construction, cost comprises di-
rect and indirect expenses for labour, materials, components
and subsuppliers.
Depreciation based on cost reduced by any residual value is cal-
culated on a straight-line basis over the expected useful lives of
the assets, which are:
Assessment of residual value and useful life is performed annu-
ally for assets under property, plant and equipment.
Impairment of property, plant and equipment
The carrying amounts of property, plant and equipment are re-
viewed on an annual basis to determine whether there is any
indication of impairment other than that expressed by deprecia-
tion. Ifso,animpairment testis carried outto determine whether
the recoverable amount is lower than the carrying amount and
the asset is written down to its lower recoverable amount.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /85
2013
Land Plant — Equipment, Leasehold Construc-
and and tools and improve- tionin
DKK million buildings machinery fixtures ments progress Total
Accumutlated cost at 1 January 2013 643.6 419.8 116.3 38.8 63.2 1,281.7
Exchange rate adjustment 9,1 -12,3 -B.5 -1.2 -1.1 -32.2
Addition 11 3.3 6.4 0.7 259.6 271.1
Transfers/reclassifications 24,5 36.9 56.9 10.7 -129.0 0.0
Disposals -2.2 -8.1 -5.3 0.0 0.0 "156
Accumulated cost at 31 December 2013 657.9 439.6 165,8 49.0 192.7 1,505.0
Accumulated depreciation and impairment
at 1 January 2013 63.9 165.2 519 93 0.0 290.3
Exchange rate adjustment -1.3 5,5 -4,2 -0.4 0.0 -11.4
Depreciation and impairment 32.5 71.6 21.0 3.7 0.0 128.8
Reclassification 0.0 -31.3 31,3 0.0 0.0 0.0
Depreciation on disposals -2.2 -8.1 -4,1 0.0 0.0 -14.4
Accumulated depreciation and impairment
at 31 December 2013 92.9 191.9 95.9 12.6 0.0 3933
Carrying amount at 31 December 2013 565.0 247.7 69.9 36.4 192.7 1,111.7
2012 Land Plant — Equipment, Leasehold Canstruc-
and and tools and improve- tion in
DKK million buildings machinery fixtures ments progress Total
Accumulated cost at 1 January 2012 607.5 390.7 80,3 20.1 714 1,170.0
Exchange rate adjustment ZA 78.9 "1,2 -0.1 70.3 -12.9
Addition 123 32.0 113 2.5 80.3 138.4
Transfers/redassifications 293 13.2 29.0 16,7 -B8.2 0.0
Disposals -3.1 -7.2 73.1 -0.4 0.0 -13.8
Accumulated cøst at 31 December 2012 643.6 419,8 1163 38.8 63.2 1,281.7
Accumulated depreciation and impairment
at I January 2012 38.4 1163 24,6 0.8 0.0 180,1
Exchange rate adjustment -0.6 -48 -0.2 -0.1 0.0 5,7
Depreciation and impairment 30.5 69.4 19,9 5.2 0.0 125.0
Reclassiftcation -3,5 -8.8 8,9 3,4 0.0 0.0
Depreciation on disposals -0.9 -6.9 -1,3 0.0 0.0 -9.1
Accumulated depreciation and impairment
at 31 December 2012 639 165.2 51,9 93 0.0 290.3
Carrying amount at 31 December 2012 579,7 254.6 64.4 29.5 63.2 991.4
1404044EogSN71233
86 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
MAISE 3 3
INVENTORIES
ACCOUNTING POLICIES
Inventories are measured at the lower of cost under the FIFO
method and net realisable value. The net realisable value of
inventories is calculated at the amount expected to be gener-
ated by sale in the process of normal operations with deduction
of selling expenses and costs of completion. The net realisable
value is determined allowing for marketability, obsolescence and
development in expected sales prices.
The cost of goods for resale, raw materials and consumables
equals landed cost.
The cost of finished goods and work in progress comprises the
cost of raw materials, consumables and direct labour with ad-
dition of indirect production costs. Indirect production costs
comprise the cost of indirect materials and labour as well as
maintenance and depreciation of the machinery, factory build-
ings and equipment used in the manufacturing process as well
as costs of factory administration and management.
KEY ACCOUNTING ESTIMATES
Inventories are stated at the lower of cost price under the FIFO-
method and net realisable value. The cost price includes direct
production costs and indirect production costs. Direct produc-
tion costs comprise raw materials, consumables and direct la-
bour, whereas indirect production costs (IPO) consist of indirect
materials, labour, maintenance, depreciations etc. Calculations
of the IPO are reviewed yearly in order to ensure that relevant
assumptions such as prices, production yield and measures of
utilisation are incorporated correctly. Changes in the parameters,
assumed production yield and utilisation levels etc. could have a
significant impact on the cost price and, in turn, on the valuation
of inventories and production costs.
Furthermore, the estimated uncertainty in inventories are re-
lated to the write-down to net realisable value, Inventories are
in general written down in accordance with Group policy, in-
dluding individual assessment of inventories for possible losses
due to obsolescence.
Inventories at 31 December, net of allowances for obsolescence comprised the following items:
DKK million 2013 2012
Raw materials and consumables 1,467.0 1,417.6
Work in progress 4757 449.7
Finished goods, goods for resale and excise stamps 984.2 913.4
2,926.9 2,780.7
Provision for obsølete stock at year-end amounted to DKK 125.0 million (DKK 111.1 million). The net movement in the yearin respect of inventory
provision is induded in 'cost of goods sold'. The cost af inventories recognised as cost and included in 'cost of goods sold" amounted to DKK 2,328.2
million (OKK 2,335.1 million).
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /87
NOTE 3.4
TRADE RECEIVABLES
ACCOUNTING POLICIES
Trade receivables are measured in the balance sheet at the
lower of amortised cost and net realisable value, which cor-
responds to nominal value less provisions for bad debts.
Provisions for bad debts are determined on the basis of
an individual assessment of each receivable, and in respect
of trade receivables, a provision is also made based on the
Company's experience from previous years and aging of the
trade receivables.
DKK million 2013 2012
Trade receivables (net) at 31 December comprised the following:
Trade receivables (gross) 834.9 996.7
Provisian for bad debt -17.8 -24.9
Trade receivables (net) 817.1 971.8
Movements in the Group provision for bad debt are as follows:
Provision for bad debt at 1 January "249 -27.6
Provision this year -1.6 -12
Reversai of provision for possible losses 5,2 3.8
Confirmed løsses 3.0 13
Effect of exchange rate adjustments 0.5 -1.2
Total provision at 31 December -17.8 "24.9
Non-impaired trade receivables can be specified as follows:
Current 662.1 801.0
Overdue < 30 days 126.4 129,4
Overdue 31 — 60 days 19.0 263
Overdue 61 —90 days 35 8.2
Overdue 91 — 180 days 45 6.7
Overdue > 180 days 16 0.2
Total 817.1 971.8
1404044EogSN71234
88 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
NØÆTE 55
PREPAYMENTS
ACCOUNTING POLICIES
Prepayments are measured at cost and comprise prepaid costs
concerning rent, licenses, insurance premiums, subscriptions,
interest etc.
MOTE 3
OTHER PROVISIONS
ACCOUNTING POLICIES
Provisions are recognised when — in consequence of an event
occurred before or on the balance sheet date — the Group has a
legal or constructive obligation and it is probable that economic
benefits must be given up to settle the obligation.
Provisions are measured at the present value of the anticipated
expenditure for settlement of the legal or constructive obligation
based on Management's best estimate. If considered material,
the anticipated future expenditure is discounted, using a pretax
rate that reflects current market assessments of the time value
of money and the risks specific to the obligation. The increase
in the provision due to the passage of time is recognised as in-
terest expense.
DKK million 2013 2012
Balance at 1 January 1293 148.2
Exchange rate adjustment 1.1 0.1
Discounting cost 3.0 42
Addition duringthe period 0.2 1.1
Utilised during the period -46.5 -24.0
Reversed provision unused -0.4 -0.3
Carrying amount at 31 December 86.7 129.3
Non-current 45.5 96.6
Current 41.2 32.7
Total 86.7 129,3
Other provisions mainly consist of restructuring costs in relation to a reduction in the number of existing machine-made cigar factories from six
to four. The restructuring costs are primarily related to redundancy payments and the main partis expected to fall due within 1-5 years.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /89
NOTE 3.7
PENSION OBLIGATIONS
ACCOUNTING POLICIES
The Group operates a number of defined contribution plans
throughout the world. In a few countries, the Group operates
defined benefit plans; these are primarily located in the Neth-
erlands, Belgium, Germany, France, Indonesia, the Dominican
Republic and the US.
Under a defined benefit plan, the amount of retirement benefit
that will be received by an employee is defined with respect
to period of service and final salary. The amount recognised in
the balance sheet is the difference between the present value
of the defined benefit obligation at the balance sheet date and
the fair value of the scheme assets. The defined benefit obliga-
tion is calculated annually by independent actuaries using the
projected unit credit method. The present value of the defined
benefit obligation is determined by discounting the estimated
future cash outflows.
The service cost of providing retirement benefits to employees
during the year is charged to operating profit.
Past service costs are recognised immediately in the income
statement.
All actuarial gains and losses are recognised immediately in full
in the statement of other comprehensive income for the period
in which they arise.
Pension assets are only recognised to the extent that the Group
is able to derive future economic benefits such as refunds from
the plan or reductions of future contributions.
The Group's most significant defined benefit pension plans are
funded by payments from Group companies and by employees
to funds independent of the Group.
Contributions for defined contribution plans are reported as an
expense in the income statement when they occur.
Post-employment employee benefits
The Group has defined benefit pension plans in a number of
subsidiaries, through which the employees are entitled to post-
employment benefits based on their pensionable income and
the number of service years.
Provisions for post-employment defined benefit plans are re-
ported based on actuarial valuations. The Group recognises the
full amount of actuarial gains and losses in other comprehensive
income, i.e.the net pension !iability in the balance sheet includes
all cumulative actuarial gains and losses.
The Group does not plan for any new defined benefit plans.
Post-employment defined benefit - recognised in the balance sheet
DKK million 2013 2012
Present value of funded obligations 585,4 593.9
Fair value of plan assets -522.5 -518.6
Deficit (+) / surplus €) 62.9 753
Present value of unfunded obligations 127.9 128.6
Unrecognised assets due to recoverability limit 18.7 13.1
Net asset () / liability (+) in the balance sheet 209.5 217.0
Amounts in the balance sheet (reported as non-current)
Liabilities 209.5 217.0
Assets 0.0 0.0
Net asset (-) / liability (+) in the balance sheet 209.5 217.0
1404044EogSN71235
90 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
PENSION OBLIGATIONS (CONTINUED)
DKK million 2013 2012
Movement during the period in the net asset (/ liability (+)
Balance at 1 January 217.0 161.0
Recognised in the income statement 31.6 243
Actuarial gain/loss recognised in comprehensive income, financial assumptions -20.3 62.5
Actuarial gain/loss recognised in comprehensive income, demographic assumptions -0.1 5.6
Asset limit 53 -14.7
Benefit payments to employees -6.6 -8.4
Emptoyer contributions -13.5 -11.9
Past service costs not recognised 0.0 -0.2
Currency effect -3.9 -1.2
Balance at 31 December 209.5 217.0
KEY ACCOUNTING ESTIMATES
Actuarial assumptions
The discount rate is set per country with reference to high
quality corporate bond yields of appropriate duration or gov-
ernment bond yields for countries where a deep market of high
quality corporate bonds is not available. Assumptions regarding
future mortality experience are based on advice in accordance
with published statistics and experience in each country. As-
sumptions regarding expected return on plan assets are based
on the asset groups as defined in each investment policy. As-
sumptions regarding expected rate of return are estimated in
each country based on the portfolio as a whole considering
both historical performance and future outlook given the long
term perspective.
Actuarial assumptions used for valuation (expressed as weighted averages and in %) 2013 2012
Discount rate 3.7 3.5
Future salary increases 33 3.2
Inflation 2.2 2.0
Significant actuarial assumptions regarding the determination of the pension obligation is the discount rate and future salary increase. The sensitiv-
ity analysis below has been determined based on likely changes in the discount rate and future salary increase occurring atthe end of the period.
1%-point 1%point
DKK million increase decrease
Discount rate -50.6 65.5
Future salary increase 80.7 -55.2
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /91
PENSION OBLIGATIONS (CONTINUED)
DKK million 2013 2012
Change in the defined benefit obligations and plan assets
Defined benefit obligatians - movement
Balance at I January 722.5 589,6
Current service costs 243 19.5
Interest cost 23.8 27.0
Recognised past service costs -1L4 2.0
Actuarial losses (+)/gains €) -24.2 116.3
Benefits paid -28.0 -27.5
Gains on curtailments 0.0 -3.5
Currency effect -3.7 -0.9
Balance at 31 December 713.3 7225
Plan assets - movement in fair value
Balance at 1 January 518.6 456.2
Interest income 16.3 20.6
Actuarial losses (-)/gains (+) -3.8 48.2
Employer contributions 20.1 19,1
Benefits paid -27.9 -27.7
Currency effect -0.1 2,2
Other -0.7 0.0
Balance at 31 December 5225 518.6
The actual return on plan assets in 2013 was a gain of DKK 12,5 million (DKK 68.7 million).
2013 2012 2013 2012
DKK million Quoted Unquoted Quoted Unquoted Total Total
Categories of plan assets
Equity securities 49.6 0.0 50.0 0.0 49.6 50.0
Bonds 257.4 0.0 153.33 0.0 257,4 153,3
Other 32.8 182.7 30.2 285.1 215.5 315.3
Total 339.8 182.7 233.5 285.1 522.5 518.6
The'Other category primarily relates to fully insured defined benefit plans in the Netherlands.
The weighted average duration of the defined benefit obligation is 9.2 years (7.7 years).
1404044EogSN71236
92 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
PENSION OBLIGATIONS (CONTINUED)
DKK million 2013 2012
Post-employment benefit plans recognised in income statement
Current service costs 243 19.5
Interest on obligation 23.8 27.0
Expected return on plan assets -158 -206
Recognised past service costs 0.5 2.0
Gains on curtailments -L4 -3.6
Recognised net actuarial løsses (+Ygains €) 0.2 0.0
Net income (-)/expense (+) reported in the income statement 31.6 24.3
The income/costs for defined benefit plans are reported under the following headings in
the income statement:
Staff costs 22.6 168
Financial costs 9.0 7.5
Net income (-)/expense (+) reported in the income statement 31.6 24.3
Amaunts recognised in other comprehensive incaome
Før the pøst-employment defined benefit plans all actuarial gains and løsses are recognised in other com-
prehensive income as they occur in accordance with the year-end valuation.
Net actuarial losses (+)/ gains () -20.4 68.1
Effect of asset limit 53 714,7
Cumulative net actuarial losses (+)/ gains €) 713 96.4
Expected contribution next year
Expected contributions for pøst-employment benefit plans forthe year ending 31 December 2013 amount tø DKK 15.3 million (DKK 18.0 million).
Defined contribution plans
The Group has certain obligations under defined contributions plans. Contributions to these plans are determined by provisions in the relevant
plan. Costs for defined contribution plans charged to income statement for the year amount to DKK 42.1 million (DKK 33.0 million).
1404044EogSN71237
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /93
SECTION 4
CAPITAL STRUCTURE AND FINANCING ITEMS
This section encompasses notes related to the Group's capital structure and financing items.
NOTE 4.1
FINANCIAL INSTITUTIONS
ACCOUNTING POLICIES
Borrowings are recognised initially at fair value, net of trans-
action costs incurred, Borrowings are subsequently carried at
amortised cost.
Fees paid on the establishment of loan facilities are recognised as
transaction costs of the loan and are amortised over the period
of the borrowings.
Other debts are measured at amortised cost, substantially cor-
responding to nominal value.
DKK million 2013 2012
Financial institutions are recognised in the balance sheet as follows:
Non-current liabilities 2,7565 3,008.9
Current liabilities 2219 232.0
Total 2,978.4 3,240.9
The Group has the following external loans as at 31 December:
Carrying amount Fair value”
Level 2
Currency Fixed/floating Maturity date 2013 2012 2013 2012
EUR Floating 31/05/16 578.2 1,156.4 578.2 1,156.4
EUR Floating 31/05/18 578.2 578.2
EUR Floating 31/05/16 578.2 1,1564 578.2 1,156.4
EUR Floating 31/05/18 578.2 578.2
USD Floating 31/05/16 665.6 928.1 665,6 928.1
2,978.4 3,240.9 2,978.4 3,240.9
> The fair value of the financial liabilities is the present value of the expected future instalments and interest payments. The zero coupon interest
rate for similar maturities is used as the capitalisation rate.
The interest rate risk related tø EUR and USD loans has been hedged by entering into fixed interest rate swap contracts.
In the event of bankruptcy among the Approved Banks', the Group has the right to offset cash deposits in the counter party bank debt total-
ing.DKK 198.09 million as of 31 December 2013 (DKK 271.6 million).
94 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
NOTE 42
FINANCIAL RISKS AND
INSTRUMENTS
ACCOUNTING POLICIES
Derivative financial instruments
Derivative financial instruments are initially recognised in the
balance sheet at fair value and are subsequently remeasured at
their fair values. Positive and negative fair values of derivative
financial instruments are classified as 'Other receivables' and
'Other liabilities', respectively.
Changes in the fair values of derivative financial instruments are
recognised in the income statement unless the derivative finan-
cial instrument is designated and qualify as hedge accounting,
see below.
Hedge accounting
Changes in the fair values of financial instruments that are des-
ignated and qualify as fair value hedges of a recognised asset
or a recognised liability are recognised in the income statement
as are any changes in the fair value of the hedged asset or the
hedged liability related to the hedged risk.
Changes in the fair values of derivative financial instruments that
are designated and qualify as hedges of expected future transac-
tions are recognised directly in'Other Comprehensive Income" as
regards the effective portion of the hedge. The ineffective por-
tion isrecognised in the incomestatement. Ifthe hedged transac-
tion results in an asset or a liability, the amount deferred in other
comprehensive income is transferred from other comprehensive
income and recognised in the cost of the asset or the liability,
respectively. If the hedged transaction results in an income or
an expense, the amaunt deferred in other comprehensive in-
come is transferred from other comprehensive income to the
income statement in the period in which the hedged transaction
is recognised. The amount is recognised in the same item as the
hedged transaction.
Risk management policy
The Group manages financial risks based on financial strategies
and policies approved by the Supervisory Board.
Asageneral policy, the Group isnotallowed to engage in financial
transactions or manage risk exposures that are not related to
hedging of underlying business driven risks, and consequently
the Group does not enter into any speculative transactions.
The Group's financial risks must be managed with the aim of
protecting the value and financial stability of the Group, tak-
ing into consideration the accounting consequences of such
transactions.
The risk management activities of the Group are managed cen-
trally by Group Treasury and primarily involve the following
different financial risks.
Foreign exchange risk
Fluctuating currency rates influence the Group's reported net
earnings, assets and liabilities and the value of future cash flows
denominated in foreign currencies.
Foreign exchange exposure in the Group consists of two types
of risk (a) cash flow risk and (b) balance sheet-translation risk
and financial risk.
Cash flow risk is related to the potential change in value of future
operations and cash flows resulting from changes in currency
rates. Such effects may have an impact on the Group's net con-
solidated earnings. Cash flow risk is hedged for a period up to
18 months.
Balance sheet risk — translation risk is related to the potential
change in value of equity in foreign subsidiaries when translat-
ing to DKK. Such effects may have an impact on the Group's
equity in DKK. As a general rule, the Group does not hedge
transiation risk.
Balance sheet risk — financial risk is related to the potential
change in value coming from the translation of financial assets
and liabilities in foreign currendes. Such effects may have an
impact on the Group's net consolidated earnings. Financial risk
due to translation of financial assets and liabilities in foreign
currency is hedged when applicable.
The Group primarily monitors foreign exchange risks in produc-
tion and sales entities and mainly the following currencies: USD,
NOK, SEK, GBP, CAD, AUD, CHF, PLN and IDR.
The Group manages foreign exchange risk through the use of
financial derivatives, such as forward contracts and options.
Due to the historically fixed currency band between DKK and
EUR, the Group considers both DKK and EUR as base currencies
and thus does not hedge foreign exchange exposure between
EUR and DKK.
A 5% increase/decrease in the USD rate would impact (before
tax) the result and equity positively/negatively by DKK 4 million
(OKK 14 million).
Interest rate risk
Fluctuating interest rates influence the Group's reported
earnings, assets and liabilities and the present value of fu-
ture cash flows resulting from changes in interest rates. The
objective of actively managing the Group's interest rate ex-
posure is to maintain the interest rate risk at a known and
acceptable level and to minimise the Group's cost of potential
borrowing requirements.
The Group's consolidated interest rate risk is measured at group
level only. The Group's interest rate exposure is determined by
aggregating the exposure of financial liabilities and financial
assets.
1404044EogSN71238
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /95
The Group has an active approach to managing the interest rate
risk through the use of interest rate derivatives, such as interest
rate swaps and interest rate options.
As at the balance sheet date, the Group has interest swap agree-
ments totalling a principal of EUR 310 million (EUR 310 million)
and USD 123 million (USD 164 million), which relate to bank
foans originally raised in 2011 and partly extented in 2013.
As the total interest rate risk of debt is hedged, a change in
interest rate would only affect the equity. Assuming the current
portfolio of swap contracts remains the same, an increase in the
USD and EUR rate of interest by one percentage point would af-
fect (before tax impact) equity positively by DKK 8.8 million (DKK
16.9 million) and .DKK 77.2 million (DKK 78.3 million), respectively.
Credit risk - operational
The Group's credit risk is primarily related to receivables, bank
deposits and derivative financial instruments and can be divided
into two main risk types.
Operational credit risk
The Group's balance sheet at 31 December 2013 included
trade receivables with a net book value of DKK 817.1 million
(DKK 971.8 million), representing a gross receivable balance
of DKK 834.9 million (DKK 996.7 million) and a bad debt
provision of DKK 17.8 million (DKK 24.9 million), based on an
individual assessment. The provision før bad debt was based
on an objective indication of impairment, such as outstanding
payments and financial difficulties, e.g. the debtor's suspen-
sion of payments, bankruptcy or expected bankruptcy.
In addition, overdue but not impaired receivables as at 31
December which have not been written down totalled DKK
155.0 million (DKK 170.8 million). Please refer to note 3.4.
The Group's net sales primarily comprise sales of tobacco to
different distributors and retailers. The Group has historically
experienced limited risk with regard to the solvency of its cus-
tomers. As part of the Group's internal procedures regarding risk
management, the operational credit risk relating to customers
is monitored on a monthly basis. The Group has no significant
concentration of credit exposure as the exposure has been
spread on a large number of creditworthy trading partners.
Credit risk - financial
The Group monitors and controls its financial resources and
relationships with financial third parties arising from its financial
activities, such as bank deposits and derivative financial instru-
ments, by establishing and regularly reviewing credit limits.
Financial credit risk management has the objective of minimis-
ing financial loss through a financial distress or the default of a
financial counterparty whether due to the financial insolvency of
the counterparty, the inability of the counterparty to perform
due to changed national legislation or any other circumstance.
The Group's exposure to counterparty risk is managed by es-
tablishing approved counterparty limits detailing the maximum
exposure that the Group is prepared to accept with respect to
the individual counterparty.
Those banks on which the Group may assume a counterparty
risk are herein referred to as 'Approved Banks'. Significant cash
deposits may only be placed with an Approved Bank. This applies
to all Group companies.
The monitoring is primarily based on review of official ratings from
Moody's and/or Standard & Poor's.
96 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
FINANCIAL RISKS AND
INSTRUMENTS (CONTINUED)
Liquidity
Maturity at After Fair value Carrying
31 December 2013 0-i year 2-5 years 5 years Total" level 2: amount
Recognised at amortised cost
Financial institutions 255.0 2,824.7 3,079.7 2,978.A
Trade payables 359.9 359.9 359.9
Other liabilities 453.4 453.4 453.4
Total 1,068.3 2,824.7 0.0 3,893.0 3,791.7
Recognised at fair value
Interest rate swaps 38.4 71.9 116.3 80.9 80.9
Forward contracts 3.2 3.2 3.2 3.2
Currency swaps 0.8 08 0.8 08
Total 42.4 77.9 0.0 120,3 84.9
Total financial liabilities 1,110.7 2,902.6 0.0 4,013.3 3,876.6
Recognised at amortised cost
Cash and cash equivalents 464,3 464,3 4643
Trade receivables 817.1 B17.1 817.1
Other receivables 102.1 102.1 102.1
Total 1,383.5 0.0 0.0 1,383.5 1,383.5
Total financial assets 1,383.5 0.0 0.0 1,383.5 1,383.5
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /97
FINANCIAL RISKS AND
INSTRUMENTS (CONTINUED)
Liquidity
Maturity at After Fair value Carrying
31 December 2012 0-1 year 2-5 years 5 years Total" level 2% amount
Recognised at amortised cost
Financial institutions 266.5 3,079.0 3,345.5 3,240.9
Trade payables 352.6 352,6 352.6
Other liabilities 506.5 506.5 5065
Total 1,125.6 3,079.0 0.0 4,204.6 4,100.0
Recognised at fair value
Interest rate swaps 42,5 97.5 140.0 123.0 123.0
Currency swaps 10.9 10.9 10,9 10.9
Total 53.4 97.5 0.0 150.9 133.9
Total financial liabilities 1,179.0 3,176.5 0.0 4,355.5 4,233.9
Recognised at amortised cost
Cash and cash equivalents 684.2 684.2 6894.2
Trade receivables 971,8 9718 9718
Other receivables 156.8 156.8 156.8
Total 1,812.8 0.0 0.0 1,812.8 1,812.8
Recognised at fair value
Forward contracts 0.3 0.3 0.3 0.3
Total 0.3 0.0 0.0 03 0.3
Total financial assets 1,813.1 0.0 0.0 1,813.1 1,813.1
+ All cash flows are non-discounted and include all liabilities according to contracts. The DKK values of future interest and principal of loans in
foreign currency are calculated based on the exchange rate as at the balance sheet date. A zero coupon interest rate for similar maturities is
used as the capitalisation rate.
”" The fair value of the financial liabilities is the present value of the expected future instalments and interest payments except for'trade paya-
bles','other liabilities','receivables' and "other receivables' which are stated at the net carrying amount at year-end.
1404044EogSN71239
98 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
FINANCIAL RISKS AND
INSTRUMENTS (CONTINUED)
Financial instruments measured at fair value are broken down
according to the following measuring hierarchy:
Level I: Observable market prices of identical instruments
Level 2: Valuation models primarily based on observable prices
or traded prices of comparable instruments
Level 3: Valuation models primarily based on non-observable
prices
The fair value of the Group's forward exchange contracts and
other derivative financial instruments (interest rate and cur-
rency swaps) are considered a level 2 fair value measurement as
the fair value is determined directly based on the published ex-
change ratesand quoted swap and forward rates on the balance
sheet date. There are no financial instruments in level 3 (none).
HEDGING TRANSACTIONS
The net fair value at 31 December 2013 of outstanding deriva-
tive contracts was negative by DKK 84.1 million (negative by
DKK 122.7 million), of which DKK 3.2 million was attributable
to forward contradts (positive 0.3 DKK million), while minus
DKK 80.9 million related to interest rate swaps (negative by
DKK 123.0 million).
Forward contracts have been used to hedge currency risk of
future cash flows denominated in GBP, CAD, NOK, IDR, CHF,
AUD and SEK by swapping the exchange rate exposure to
fixed payments in DKK and EUR. The total notional amount of
these outstanding forward contracts was DKK 223.0 million as
at 31 December 2013 (DKK 398.8 million). All forward contracts
expire within 9 months (within 12 months).
Currency swaps have been used to hedge currency risk on the
principal of an internal loan denominated in PLN. The total
notional amount of currency swaps as hedge transactions was
DKK 3.0 million as at 31 December 2013 (DKK 2.7 million).
Interest rate swaps have been used to hedge the floating rate on
bank loans. As at the balance sheet date, the Group has outstand-
ing interest rate swaps with a notional amount of EUR 310 mil-
lion and USD 123 million (EUR 310 million and USD 164 million).
Interest rate swaps follow the maturity date of the bank loans.
The net fair value stated will be transferred from the reserve
for hedging to the income statement as and when the hedged
transactions are realised.
OTHER TRANSACTIONS
The Group uses financial transactions which do not qualify to
hedge accounting according to IFRS. The net fair value at 31 De-
cember 2013 of outstanding currency swaps was negative by DKK
0.8 million (negative by DKK 10.9 million). The currency swaps are
used to manage Group liquidity. As of the balance sheet date, the
Group has outstanding currency swaps with a notional amount
of DKK 396,5 million (DKK 588.7 million).
CHANGES IN WORKING CAPITAL
(CASH FLOW STATEMENT)
ACCOUNTING POLICIES
Working capital is defined as current assets less current liabilities.
lt measures how much in liquid assets the Group has available
for the business.
DKK million 2013 2012
Change in receivables 1705 -120.6
Change in inventories -230.4 -1243
Change in liabilities -94,5 -92.2
Change in balances with affiliated companies (trade) 35.9 -23.5
-118.5 -360.6
1404044EogSN71240
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /99
NOTE 4.4
FINANCIAL FIXED ASSETS
ACCOUNTING POLICIES
Investments in associated companies are recognised and meas-
ured under the equity method.
The item 'Investments in associated companies' in the balance
sheet includes the proportionate ownership share of the net
asset value of the enterprises calculated on the basis of the
fair values of identiftiable net assets at the time of acquisition
with deduction or addition of unrealised intercompany profits
or losses and with addition of any remaining value of positive
differences (goodwill) and dedudtion of any remaining value
of negative differences (negative goodwill).
The item 'Share of profit of associated companies, net of tax in
the income statement includes the proportionate share of the
profit after tax for the year regarding the associated companies.
2013
Investments
in associated
DKK million companies Other
Cost at 1 January 2013 92.6 0.8
Addition 0.0 0.0
Deduction 0.0 -0.1
Accumulated cost at 31 December 2013 92.6 0.7
Accumulated revaluation and impairment at 1 January 2013 12.1 0.0
Dividend -A,4 0.0
Currency translation -8.2 0.0
Profit aftertax 5.4 00
Accumulated revaluation and impairment at 31 December 2013 49 0.0
Carrying amount at 31 December 2013 97.5 0.7
The Group's share of the results of its associated company and its aggregated assets (including goodwill) and liabilities is as follows
(DKK million):
% interest
Name and country of incorporation Assets Liabilities Revenues — Profit/ (Loss) held
Caribbean Cigar Holdings Group Co. S.A, Panama 555.5 68.0 230.5 27.0 20
100 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
FINANCIAL FIXED ASSETS
(CONTINUED)
2012
Investments
in associated
DKK million companies Other
Cost at 1 January 2012 92.6 46
Addition 0.0 0.0
Deduction 0.0 -3.8
Accumulated costat 31 December 2012 92.6 08
Accumulated revaluation and impairment at 1 January 2012 56 0.0
Dividend -3.9 0.0
Currency translation -1.5 0.0
Profit after tax 119 0.0
Accumulated revaluation and impairment at 31 December 2012 12.1 0.0
Carrying amount at 31 December 2012 104.7 0.8
The Group's share of the results of its associated company and its aggregated assets (induding goodwill) and liabilities is as follows
(DKK million):
% interest
Name and country of incorporation Assets Liabilities Revenues — Profit/ (Loss) held
Caribbean Cigar Holdings Group Co.5.A, Panama 594,5 71.0 2275 59.5 20
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 101
NOTE 4,5
FINANCIAL INCOME AND COSTS
ACCOUNTING POLICIES
Financial income and costs comprise interests, realised and un-
realised exchange adjustments, hedging costs, interest part of
pension costs and other financial income and costs.
FINANCIAL INCOME
DKK million 2013 2012
Interest on deposits in financial institutions etc. 2.7 41
Other financial income 3.0 13
5.7 5.4
FINANCIAL COSTS
DKK million 2013 2012
Interest to financial institutions etc. 81.3 85.2
Interest part of pension cost 9.0 7.5
Exchange losses, net 11.0 1.9
Other financing costs 8.8 11.5
110.1 106.1
Interest on debt to financial institutions etc. includes cost of interest rate swaps of DKK 35 million in 2013 (cost of DKK 37 million).
The Group incurred loan costs of DKK 11.5 million in connection with the establishment of bank Ioans in 2011. The costs are amortised over five
years. In 2013, a cost of. DKK 2.3 million is induded in interest on debt to financial institutions etc. (cost of DKK 2.3 million).
Other financing costs indude discounting effect of provisions of DKK 3.0 million (DKK 4.2 million).
1404044EogSN71241
102 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
br OTION 5
OTHER DISCLOSURES
This section includes other statutory notes or notes that are of secondary importance for understanding the financial performance
of the Group.
MOTES 1
CASH FLOW ADJUSTMENTS
For the purpose of presenting the cash flow statement, non-cash
items with effect on the income statement must be reversed to
identify the actual cash flow effect from the income statement.
The adjustments are specified as follows:
DKK million 2013 2012
Financial items 104.4 100.7
Share of profit of associated companies, net of tax 54 119
Amortisatian and impairment 271.1 244,9
Depreciation and impairment 128.8 125.0
Income taxes 102.9 224,4
601.8 683.1
CONTINGENT LIABILITIES
ACCOUNTING POLICIES
All leases are classified as operating leases. Payments made
under operating leases are recognised in the income statement
on a straight-line basis over the lease term.
LEASE OBLIGATIONS
The Group has entered into operating lease agreements for of-
fices and warehouses, cars and equipment The lease terms are
between 1 and 15 years, and the majority of lease agreements
are renewable at the end of the lease period at market rate.
DKK million 2013 2012
Lease expenditures charged to the income statement duringthe year 96.6 111.2
Future minimum lease payment under operating lease contracts and rent commitments amounts to:
Within 1 year 102.4 112.6
Between I and 5 years 1271 183.5
After 5 years 717 541
301.2 350.2
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 103
CONTINGENT LIABILITIES
(CONTINUED)
GUARANTEE OBLIGATIONS
The Group has guarantee obligations totalling DKK 497.5 million
(DKK 493,9 million), primarily given to local tax authorities in
relation to excise and tax stamps.
LAWSUITS ETC.
From time to time the Group faces legal claims and disputes as
part of the ordinary course of business, mainly related to em-
ployees and trademarks. At present there are no ongoing legal
actions, claims or disputes that represent any material risk to the
future financial results of the Group.
Through participation in jointtaxation schemesthe Group is joint
and several liable for tax payables.
NOTE 5.3
RELATED-PARTY TRANSACTIONS
Related parties comprise companies controlled by the Au-
gustinus Foundation, Swedish Match AB and key management
personnel. Key management personnel! with significant influ-
ence over the company are Scandinavian Tobacco Group A/S'
Supervisory Board and Executive Board as well as management
in the controlling companies.
The Group has had the following material transactions with re-
lated parties, income/expense (+/-):
DKK million 2013 2012
Skandinavisk Holding A/S
Services provided by Scandinavian Tobacco Group 3.1 28
Skandinavisk Holding Il A/S
Services provided by Scandinavian Tobacco Group 0.0 0.8
Dagrofa aps
Sale of products from Scandinavian Tobacco Group (until 29.10.13) 745 100.1
Tivoli A/S
Sale of products and sponsorship to Scandinavian Tobacco Group -0.9 0.9
Swedish Match AB
Purchase of products by Scandinavian Tobacco Group -119.1 -124,8
Sale of products from Scandinavian Tobacco Group 68.1 36.8
Caribbean Cigar Holdings (Associated company)
Purchase of products by Scandinavian Tobacco Group -45.0 -30.0
At 31 December the Group had the following outstanding balance with related parties receivable/payable (+/-):
Skandinavisk Holding A/S 16 0.8
Skandinavisk Holding II A/S 0.0 16.7
Dagrofa aps (until 29.10.13) 0.0 20.0
Total 16 375
1404044FogSN71242
104 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /FINANCIAL STATEMENTS
RELATED-PARTY TRANSACTIONS
(CONTINUED)
For information on remuneration to the Management of Scan-
dinavian Tobacco Group A/S, please refer to note 2.2. For an
overview of Group companies, please refer to note 5.6. There
have not been and are no loans to key management personnel
in 2013 or 2012.
Dividends to shareholders have not been included in the above
overview.
Ownership and Consolidated Financial Statements
The direct shareholders of Scandinavian Tobacco Group A/S are
the following:
Skandinavisk Holding II A/S, Soeborg, Denmark (51%)
NUTE 55%
FEE TO STATUTORY AUDITOR
Swedish Match Cigar Holding AB, Stockholm, Sweden (49%)
The ultimate parent company is the Augustinus Foundation (via
Skandinavisk Holding A/5).
Scandinavian Tobacco Group A/S is included in the Consolidated
Financial Statements of Skandinavisk Holding A/S as the smallest
group and Augustinus Fabrikker A/S as the largest group.
NOTE 4
EVENTS AFTER THE REPORTING
PERIOD
The Group has not experienced any significant events after 31
December 2013 which have an impact on the annual report.
DKK million 2013 2012
Statutory audit 45 44
Audit-related services 03 0.6
Tax advisory services 2.0 43
Other services 28 0.2
Total fee to statutory auditors 9.6 95
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 105
NOTE 5.6
ENTITIES IN SCANDINAVIAN TOBACCO GROUP
Activity
2
i 5
8 2 E
i 23 & &
Company name Country Qwnership Eg å e i
Parent company
Scandinavian Tobacco Group A/S Denmark - . . .
Subsidiaries by region
Europe
Bogaert Cigars NV. Belgium 100% .
Scandinavian Tobacco Group Belux NV. Belgium 100% .
Scandinavian Tobacco Group Lummen NV, Belgium 100% .
Scandinavian Tobacco Group Belgium Services NV. Belgium 100% .
Scandinavian Tobacco Group Zagreb d.0.0. Croatia 100% .
Scandinavian Tobacco Group Assens A/S Denmark 100% . .
Scandinavian Tobacco Graup Denmark A/S Denmark 100% .
Scandinavian Tobacco Group Nykøbing ApS Denmark 100% .
STG Finans ApS Denmark 100% .
STG Latin Holding ApS Denmark 100% .
Peter Stokkebye Tobaksfabrik A/S Denmark 100% .
Scandinavian Tobacco Group France S.AS France 100% .
Scandinavian Tobacco Graup Deutschland GmbH Germany 100% .
Scandinavian Tobacco Group Italy S.R.L. Italy 100% .
Scandinavian Tobacco Group Norway AS Norway 100% .
Scandinavian Tobacco Group Polska Sp. z 0.0. Poland 100% .
Swedish Match Fosforos Portugal S.A. Portugal 100% .
STG Portugal SA. Portugal 100% .
Scandinavian Tobacco Group d.0.0. Slovenia 100% .
Scandinavian Tobacco Group Spain S.A.U. Spain 100% .
Intermatch Sweden AB Sweden 100% .
P.G.C. Hajenius BM. The Netherlands 100% .
Scandinavian Tobacco Group Eersel BV. The Netherlands 100% . . .
Scandinavian Tobacco Group Nederland BV. The Netherlands 100% .
Scandinavian Tobacco Group Tobacco Service BM. The Netherlands 100% .
ST Cigar Group Holding BV. The Netherlands 100% .
STG Finance BY. The Netherlands 100% .
Scandinavian Tobacco Group United Kingdom Limited United Kingdom 100% .
1404044EogSN71243
106 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / FINANCIAL STATEMENTS
ENTITIES IN SCANDINAVIAN TOBACCO GROUP
(CONTINUED)
Activity
e
2 8
8 2 $£
E E 2 3
i 2 E å
Company name Counfry Ownership E " S "
Asia
Scandinavian Tobacco Group Hong Kong Limited Hang Kong 100% .
PT Scandinavian Tobacco Group Indonesia Indonesia 100% .
Australia and New Zealand
Scandinavian Tobacco Group Australia Pty Ltd Australia 100% . .
Scandinavian Tobacco Group New Zealand Ltd New Zealand 100% .
America
Scandinavian Tobacco Group Canada Holding Inc. Canada 100% .
Scandinavian Tobacco Group Canada Inc. Canada 100% .
General Cigar Dominicana SA The Dominican Republic 100% .
Honduras American Tabaco SA de CV Honduras 100% .
Scandinavian Tobacco Group Danli'S.A. Honduras 100% .
Scandinavian Tobacco Group Esteli, SA. Nicaragua 100% .
Scandinavian Tobacco Group Moca S.A. Panama 100% .
Scandinavian Tobacco Group US Holding, Inc. United States 100% .
General Cigar C0., Inc. United States 100% .
Cigar Masters Inc. United States 100% .
General Cigar Sales Co. Inc. United States 100% .
GEMM Co. Inc. United States 100% .
Club Macanudo (Chicago), Inc. United States 100% .
Club Macanudo, Inc. United States 100% .
Henri Wintermans Cigars USA, Inc. United States 100% .
Cigars International, Inc United States 100% .
Scandinavian Tobacco Group Lane Holding, Inc. United States 100% .
Scandinavian Tobacco Group Lane Ltd United States 100% . .
Cigar Smokers Restaurant Holdings, Inc. United States 100% .
Bethlehem Restaurant Corporation Inc. United States 100% .
CI Hamburg Superstore Lounge, LLC United States 100% .
Scandinavian Tobacco Group Belgium Services NY. is a new company in 2013 providing services.
FINANCIAL STATEMENTS / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /107
NOTE 5.7
EXPLANATION OF FINANCIAL RATIOS
Gross profit
Gross margin =
Netsales
EBITDA
EBITDA margin =
Net sales
EBIT
EBIT margin =
Netsales
Tax
Tax percentage =
Profit before tax
EBIT
Return on assets =
Total assets
Equity
Equity ratio =
quity Total assets
Net profit for the year
Return on equity = —
Average equity
Net interest bearing debt= Interest-bearing liabilites and pensions less cash equivalents and interest-bearing receivables
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1404044EogSN71247
112/ SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
INCOME STATEMENT
— PARENT COMPANY
UJANMUARY - 31 DECEMBER
DKK million Note 2013 2012
Other income 222.0 197.0
Other external costs -106.7 -102.3
Staff costs 2 -95,7 -92.9
Earnings before interest, tax, depreciation and amortisation (EBITDA) 19.6 1.8
Depreciation 3 -1.0 -1.0
Earnings before interest, tax and amortisation (EBITA) 18.6 0.8
Amortisation 3 -10.0 -8.9
Earnings before interest and tax (EBIT) 8.6 -8.1
Result of investments in affiliated companies, net of tax fj 3356 371.2
Financial income 5 98.2 132.1
Financial costs 6 -90.7 -92.6
Profit before tax 351.7 402.6
Income taxes 7 -8.4 -16.9
Net profit forthe year 343,3 385.7
DISTRIBUTION OF PROFIT
Proposed distribution of profit:
Proposed dividend 382.0 412.0
Reserve for retained earnings — equity method 0.0 -33.2
Retained earnings -38.7 6.9
343.3 385.7
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/7113
BALANCE SHEET AT 31 DECEMBER
— PARENT COMPANY
ASSETS
DKK million Note 2013 2012
Other intangible assets 20.4 30.0
Intangible assets 8 20.4 30.0
Equipment, tools and fixtures 0.1 03
Leasehold improvements 44 5.2
Property, plant and equipment 9 4.5 55
Investments in affiliated companies 9,449,5 9,149.2
Financial frxed assets 10 9,449.5 9,149.2
Fixed assets 9,474.4 9,184.7
Receivables from affiliated companies 2,553.8 3,447,1
Other receivables 1.7 3.7
Prepayments 11 12.8 16.6
Total receivables 2,568.3 3,467.4
Cash and cash equivalents 244,7 319,5
Current Assets 2,813.0 3,786.9
Assets 12,287.4 12,971.6
1404044EogSN71248
114/ SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
BALANCE SHEET AT 31 DECEMBER
— PARENT COMPANY
EUUITY PROVISUNS AND IIARII TES
DKK million Note 2013 2012
Share capital 100.0 100.0
Retained earnings 7,157.8 7,4494
Proposed dividend 382.0 412.0
Equity 7,639.8 7,961.4
Deferred income tax liabilities 7 64 8.2
Pension obligations 12 17.1 133
Other provisions 12 4.0 4.0
Provisions 27.5 25,5
Bank loans 2,756.5 3,008.9
Long-term liabilities 2,756.5 3,008.9
Bank loans 221.9 2320
Liabilities to affiliated companies 1,488.1 1,539.7
Income tax payable 19.2 716
Trade creditors 129 165
Other liabilities 121.5 180.0
Current liabilities 1,863.6 1,975.8
Liabilities 4,620.1 4,984.7
Equity, provisions and liabilities 12,287.4 12,971.6
Contingent liabilities 13
Financial instruments 14
Related-party transactions 15
Qwnership 16
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /115
STATEMENT OF CHANGES IN EQUITY
— PARENT COMPANY
I JANUARY - 31 DECEMBER
Reserve for
retained
Share earnings - Retained Propøsed
DKK million capital equity method earnings dividends Total
Equity at 1 Janwary 2013 100.0 0.0 7,449A 412,0 7,961.4
Fair value adjustments of hedging instruments 38.9 38.9
Tax of hedging instruments -9,7 -9.7
Equity movement in subsidiaries 9.1 9.1
Foreign exchange adjustments of net investments
in foreign subsidiaries -291.2 -291.2
Dividend paid -412.0 -412.0
Profit / loss for the year -38.7 382.0 343,3
Equity at 31 December 2013 100.0 0.0 7,157.8 382.0 7,639.8
Equity at I January 2012 100.0 102.7 7,490.6 350.0 8,043.3
Fair value adjustments of hedging instruments -64.1 64.1
Tax of hedging instruments 16.0 16.0
Equity movement in subsidiaries -39.2 -39.2
Foreign exchange adjustments of net investments
in foreign subsidiaries -30.3 -30.3
Dividend paid -350.0 -350.0
Profit / loss for the year -33.2 6.9 412,0 385,7
Equity at 31 December 2012 100.0 0.0 7,449.4 412.0 7,961.4
The share capital consists of 100,000,090 shares of a nomina! value of DKK 1. No shares carry any special rights.
The share capita! was increased by DKK 99.9 million in 2010. Apart from this, there has been no changes to the share capital in the past five
years.
1404044EogSN71249
116 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
NOTES TO THE
PARENT COMPANY
mio ryg
NUctEl!
ACCOUNTING POLICIES
The Parent Company has prepared its Financial Statements in
accordance with the provisions of the Danish Financial State-
ments Act applying to large enterprises of reporting class C.
The Consolidated Financial Statements have been prepared in
accordance with IFRS. The accounting policies applied for the
Consolidated Financial Statements are regarding recognition
and measurement also applied for the Parent Company with
the below exceptions.
RESULT OF INVESTMENTS IN AFFILIATED COMPANIES,
NET OF TAX
The item 'Result of investments in affliated companies, net of
tax' in the income statement includes the proportionate share
of the profit for the year after tax less goodwill amortisation.
GOODWILL
Goodwill is amortised on a straight-line basis over the estimated
usefu! life determined on the basis of Management's experience
with the individual business areas. The maximum amortisation
period is 20 years, the longest period applying to enterprises
acquired for strategic purposes with a strong market position
and a long earnings profile.
TRADEMARKS
Trademarks are amortised on a straight-line basis over the es-
timated useful life determined on the basis of Managements
experience. The maximum amortisation period is 20 years, the
longest period applying to strategic trademarks with a strong
market position and a long earnings profile.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies are recognised and meas-
ured under the equity method.
The items "Investments in affiliated companies' in the balance
sheet include the proportionate ownership share of the net
asset value of the enterprises calculated on the basis of the
fair values of identiftrable net assets at the time of acquisition
with deduction or addition of unrealized intercompany profits
or løsses and with addition of any remaining value of positive
differences (goodwill) and deduction of any remaining value of
negative differences (negative goodwill).
The total net revaluation of investments in subsidiaries is trans-
ferred upon distribution of profit to 'Reserve for retained earn-
ings — equity method" under equity. The reserve is reduced by
dividend distributed to the Parent Company and adjusted for
other equity movements in subsidiaries.
DEFINED BENEFIT PENSION PLANS
In relation to defined benefit pension, the provisions in IAS
19 have been adopted. Derogation from the Danish Financial
Statements Act for defined benefit pension plans means that
the year's actuarial fluctuations are recognised in the statement
of equity rather than the income statement. For the monetary
impact please refer to the statement of changes in equity and
note 3.7 'Pension obligations' regarding the Group.
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/117
NOTE 2
STAFF COSTS
DKK million 2013 2012
Salaries 86.9 85.2
Pensions 8.8 8.1
Other social security costs 0.0 -0.4
95.7 925
Salaries and fees to the Supervisory and Executive Boards:
Supervisory Board 49 44
Executive Board 30.9 30.2
35.8 34.6
Average number of employees 82 74
NOTE 3
DEPRECIATION AND AMORTISATION
DKK million 2013 2012
Depreciation
Equipment, tools and fixtures 0.2 03
Leasehald improvements 08 0.7
1.0 1.0
Amortisation
Other intangible assets 10.0 8.9
10.0 8.9
NOTE 4
RESULT OF INVESTMENTS IN
AFFILIATED COMPANIES, NET OF TAX
DKK million 2013 2012
Result of investments in affiliated companies, net of tax 335.6 371,2
335.6 371.2
1404044EogSN71250
118/ SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
NØTE 3
FINANCIAL INCOME
DKK million 2013 2012
Interest on deposits in financial institutions etc. 0.4 15
Interest on balances with affiliated companies 90.1 120.1
Exchange gains, net 77 10.5
98.2 132.1
NUTE ;
FINANCIAL COSTS
DKK million 2013 2012
Interest on debt to financial institutions etc. 80.5 84.6
Interest on balances with affiliated companies 9.2 7.2
Other financing costs 1.0 08
90.7 92.6
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/1119
NOTE 7
INCOME TAXES
DKK million 2013 2012
Current income tax 16.6 23.3
Deferred income tax -12.3 -15,4
Adjustment regarding prior years, current income tax -6.4 -73
Adjustrent regarding prior years, deferred income tax 10.5 16.3
8.4 165
Scandinavian Tobacco Group A/S and its Danish subsidiaries are jointly taxed with all Danish companies
controlled by Chr. Augustinus Fabrikker A/S. Chr. Augustinus Fabrikker A/S is the management company for the
jøintly taxed companies and settles corporate taxes with the tax authorities.
Breakdown of deferred income tax:
Intangible assets 51 75
Property, plant and equipment 0.1 -17
Receivables 44 2.4
Other liabilities -3.2 0.0
6.4 8.2
Breakdown of income taxes:
Tax calculated at 25% of profit before tax 87.5 100.7
Tax effect of:
Adjustment regarding prior years 41 9.0
Non-deductable costs 0.3 0.1
Result of investments in affiliated companies -83.9 -92.9
8.4 16.9
1404044EogSN71251
120 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
MYTER
INTANGIBLE ASSETS
Other
intangible
DKK million assets
Accumulated cost at 1 January 2013 446
Addition 0.4
Disposal 0.0
Accumulated cost at 31 December 2013 45.0
Accumulated amortisation at I January 2013 14.6
Amortisation 10.0
Accumulated amortisation at 31 December 2013 24.6
Carrying amount at 31 December 2013 20.4
MVUTE 1
PROPERTY, PLANT AND EQUIPMENT
Equipment,
tools and Leasehold
DKK million fixtures improvements Total
Accumulated cost at 1 January 2013 0.9 6.7 7.6
Addition 0.0 0.0 0.0
Dispøsa! 0.0 0.0 0.0
Accumulated cøst at 31 December 2013 0.9 6.7 76
Accumulated depreciation at 1 Janvary 2013 0.6 15 2.1
Depreciation 0.2 0.8 10
Depreciation on disposals 0.0 0.0 0.0
Accumulated depreciation at 31 December 2013 0.8 2.3 3.1
Carrying amount at 31 December 2013 0.1 4.4 45
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013/121
NOTE 10
INVESTMENTS IN AFFILIATED COMPANIES
DKK million 2013 2012
Accumulated cost at 1 January 9,695.1 8,134.7
Addition 1,033.6 1,560.4
Dispøsal 0.0 0.0
Accumulated costat 31 December 10,728.7 9,695.1
Accumulated revaluation and impairment at 1 January -545.9 102.7
Dividends -786.8 -950.3
Currency translation -291.2 -30.3
Equity adjustments 9.1 -39.2
Profit after tax 3356 371,2
Accumulated revaluation and impairment at 31 December -1,279.2 -545.9
Carrying amount at 31 December 9,449.5 9,149.2
Investments in affiliated companies can be specified as follows:
Name Country Ownership
Scandinavian Tobacco Group Australia Pty Ltd, Australia 100%
Scandinavian Tobacco Group Zagreb d.0.0. Croatia 100%
Scandinavian Tobacco Group Assens A/S Denmark 100%
Scandinavian Tobacco Group Denmark A/S Denmark 100%
STG Finans ApS Denmark 100%
STG Latin Holding ApS Denmark 100%
General Cigar Dominicana SA The Dominican Republic 100%
Scandinavian Tobacco Group Deutschland GmbH Germany 100%
Scandinavian Tobacco Group Hong Kong Limited Hong Kong 100%
Scandinavian Tobacco Group Italy S.R.L. Italy 100%
ST Cigar Group Holding BY. The Netherlands 100%
Scandinavian Tobacco Group Norway AS Norway 100%
Scandinavian Tobacco Group Polska Sp. z 0.0. Poland 100%
STG Portugal S.A. Portugal 100%
Scandinavian Tobacco Group d.9.0. (Slovenia) Slovenia 100%
Scandinavian Tobacco Group Spain S.A.U. Spain 100%
Intermatch Sweden AB Sweden 100%
Cigar Smokers Restaurant Holdings, Inc. United States 100%
Scandinavian Tobacco Group Lane Holding, Inc. United States 100%
Scandinavian Tobacco Group US Holding, Inc. United States 100%
NOTE L1
PREPAYMENTS
Prepayments comprise prepaid costs relating to rent, licenses, insurance etc.
1404044EogSN71252
122 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
NOTE 12
PENSION OBLIGATIONS
AND OTHER PROVISIONS
Pension
DKK million obligations Other
Balance at 1 January 13.3 4.0
Additions during the period 3.8 0.0
Utilised during the period 0.0 0.0
17.1 4.0
Expected due:
Within 1 year 0.0 0.0
Between 1 and 5 years 0.0 4.0
After 5 years 17.1 0.0
17.1 4.0
NG TE ni
CONTINGENT LIABILITIES
GUARANTEE OBLIGATIONS
The Company has guarantee obligations totalling DKK 491 mil-
lion at 31 December 2013 (DKK 484 million).
LEASE OBLIGATIONS
Minimum lease payment under operating lease contracts and
rent commitments amounts to:
DKK million 2013 2012
Within 1 year 49.8 50.4
Between 1 and 5 years 5.0 41.6
After 5 years 0.0 0.0
54.8 92.0
FINANCIAL INSTRUMENTS
Reference is made to note 4.2 regarding the Group.
RELATED-PARTY TRANSACTIONS
Related parties comprise companies controlled by the Augusti-
nus Foundation or Swedish Match AB, the Management at Scan-
dinavian Tobacco Group A/S and Management in controlling
companies.
OWNERSHIP
The direct shareholders of Scandinavian Tobacco Group A/S are
the following:
Skandinavisk Holding I A/S, Søeborg, Denmark (51%)
Swedish Match Cigar Holding AB, Stockholm, Sweden (49%)
The ultimative parent company is the Augustinus Foundation
(via Skandinavisk Holding A/S).
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 /123
MANAGEMENT'S STATEMENT
The Executive and Supervisory Boards have today considered
and adopted the Annual Report of Scandinavian Tobacco Group
A/S for the financial year 1 January to 31 December 2013.
The Consolidated Financial Statements are prepared in ac-
cordance with International Financial Reporting Standards as
adopted by the EU, and the Financial Statements for the Parent
Company are prepared in accordance with the Danish Financial
Statements Act.
In our opinion, the Consolidated Financial Statements and the
Financial Statements for the Parent Company give a true and
Soeborg, 5 March 2014
EXECUTIVE BOARD
Årduis 5
Anders Colding Friis
fair view of the financial position at 31 December 2013 of the
Group and the Company and of the results of the Group and
the Company's operations and consolidated cash flows for the
financial year 1 January to 31 December 2013.
In our opinion, Management's Review includes a true and fair
account of the development in the operations and financial cir-
cumstances of the Group and the Company, of the results for the
year and of the financial position ofthe Group and the Company
as well as a description of the more significantrisks and elements
of uncertainty facing the Group and the Company.
We recommend that the Annual Report be adopted at the An-
nual General Meeting.
OY
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Christian Hother Sørensen Niels Frederiksen
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Rob Zwarts
SUPERVISORY BOARD
"” Jørgen Tåndrup
Chairman
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124 / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / PARENT COMPANY
INDEPENDENT AUDITOR'S REPORTS
To the Shareholders of Scandinavian Tobacco Group A/S
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS AND
PARENT COMPANY FINANCIAL
STATEMENTS
We have audited the Consolidated Financial Statements and the
Parent Company Financial Statements of Scandinavian Tobacco
Group A/S for the financial year 1 January to 31 December 2013,
which comprise income statement, balance sheet, statement of
changes in equity and notes including summary of significant
accounting policies for both the Group and the Parent Company,
as well as consolidated cash flow statement and statement of
comprehensive income for the Group. The Consolidated Finan-
cial Statements are prepared in accordance with International
Financial Reporting Standards as adopted by the EU, and the
Parent Company Financial Statements are prepared under the
Danish Financia! Statements Act
MANAGEMENT'S RESPONSIBILITY FOR THE
CONSOLIDATED FINANCIAL STATEMENTS
AND THE PARENT COMPANY FINANCIAL STATEMENTS
Management is responsible for the preparation of Consolidated
Financial Statements that give a true and fair view in accordance
with International Financial Reporting Standards as adopted
by the EU, and for preparing Parent Company Financial State-
ments that give a true and fair view in accordance with the
Danish Financial Statements Act, and for such internal control!
as Management determines is necessary to enable the prepara-
tion of Consolidated Financial Statements and Parent Company
Financial Statements that are free from material misstatement,
whether due to fraud or error.
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on the Consolidated
Financial Statements and the Parent Company Financial State-
ments based on our audit. We conducted our audit in accord-
ance with International Standards on Auditing and additional
requirements under Danish audit regulation. This requires that
we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance that the Consolidated
Financial Statements and the Parent Company Financial State-
ments are free from material misstatement.
An audit involves performing audit procedures to obtain audit
evidence about the amounts and disclosures in the Consolidated
Financial Statements and the Parent Company Financial State-
ments. The procedures selected depend on the auditor's judg-
ment, including the assessment of the risks of material misstate-
ment of the Consolidated Financial Statements and the Parent
Company Financial Statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal
control relevant to the Company's preparation of Consolidated
Financial Statements and Parent Company Financial Statements
that give a true and fair view in order to design audit procedures
thatare appropriate inthe circumstances, butnot forthe purpose
of expressing an opinion on the effectiveness of the Company's
internal control. An audit also includes evaluating the appropri-
ateness of accounting policies used and the reasonableness of
accounting estimates made by Management, as well as evaluat-
ing the overall presentation of the Consolidated Financial State-
ments and the Parent Company Financial Statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
The audit has not resulted in any qualification.
OPINION
In our opinion, the Consolidated Financial Statements give a
true and fair view of the Group's financial position at 31 De-
cember 2013 and of the results of the Group's operations and
cash flows for the financial year 1 January to 31 December 2013
in accordance with International Financial Reporting Standards
as adopted by the EU. Moreover, in our opinion, the Parent
Company Financial Statements give a true and fair view of
the Parent Companys financial position at 31 December 2013
and of the results of the Parent Company's operations for the
financial year 1 January to 31 December 2013 in accordance
with the Danish Financial Statements Act.
PARENT COMPANY / SCANDINAVIAN TOBACCO GROUP / ANNUAL REPORT 2013 / 125
STATEMENT ON MANAGEMENT'S
REVIEW
We have read Management's Review in accordance with the
Danish Financial Statements Act. We have not performed any
procedures additional to the audit of the Consolidated Finan-
cial Statements and the Parent Company Financial Statements.
On this basis, in our opinion, the information provided in Man-
agement's Review is consistent with the Consolidated Financial
Statements and the Parent Company Financial Statements.
Copenhagen, 5 March 2014
PricewaterhouseCoopers
Stasautoriseret Revisionspartnerselskab
ÅRG, me
LL) Clan Fer
Kim Fåchsel Thomas Wraae Holm
State Authorised Public Accountant State Authorised Public Accountant
1404044EogSN71254
W,
1404044EogSN71255
Scandinavian Tobacco Group A/S
Sydmarken 42
2860 Soeborg
Denmark
USE EEN
E-mail: infoéest-group.com
Website: www.st-group.com
(EET URE]