Swedish Match CEO Lars Dahlgren comments:
In the second quarter we delivered the strongest sales performance and, excluding one-time items, highest operating profit ever. Compared with the same period last year sales increased for all product lines, and operating profit increased for all product lines except for lights. Snus sales and volumes grew in all Scandinavian markets. In the US we continued to gain market share for snuff, and volumes grew by 21 percent. The strong volume gain was aided by the replenishment of trade inventories following the federal excise tax related destocking at the end of the first quarter. Our US mass market cigar business delivered an unusually strong operating margin, as increased demand for cigars in the new "foil fresh" packaging to a large extent compensated for the expected volume drop following the tax related hoarding in the first quarter. The announced sale of our South African pipe and nasal snus operations should be completed in the second half of the year, with a capital gain in excess of 500 MSEK. For the second half of the year, we expect Group sales and operating profit excluding larger one-time items to exceed prior year.
On July 2, 2009, Swedish Match AB announced the agreement to sell its South African operations, Swedish Match South Africa (Proprietary) Limited. In this half year report, Swedish Match's South African operations have therefore been reported as discontinued operations. Following this change, the segments have been reclassified with the remainder of the former pipe tobacco and accessories segment now being reported in other operations. Financial commentary and tables do not include the discontinued operations unless explicitly stated.
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[b]Sales and results for the second quarter[/b]
Sales for the second quarter of 2009 increased by 16 percent to 3,666 MSEK (3,164) compared to the second quarter of 2008. Currency translation has affected the sales comparison positively by 425 MSEK. In local currencies, sales increased by 2 percent.
Sales of snuff in the second quarter increased by 17 percent to 1,087 MSEK (926) and operating profit increased by 15 percent to 463 MSEK (403). Scandinavian snus sales were up 8 percent compared to the second quarter of the prior year while volumes measured in number of cans increased by 6 percent.
In the US, sales of snuff in local currency increased by 13 percent, while operating profit was significantly higher, due in part to unusually strong volumes as federal excise tax (FET) related destocking in the first quarter was reversed. US volumes were up 21 percent in the second quarter and up 8 percent for the year to date period.
The operating margin for the snuff product group was 42.6 percent, up from 40.9 percent in the first quarter, despite lower net sales prices in the US after the absorption of the increased federal excise tax effective April 1st.
For cigars, sales increased by 25 percent during the second quarter to 1,129 MSEK (905). Operating profit increased to 281 MSEK (183). US cigar sales grew by 3 percent in dollar terms, with sales basically flat for premium cigars, and up for machine made cigars. The expected volume decline from the FET related hoarding in the first quarter was lower than anticipated for mass market cigars following strong demand for "foil fresh" packaged small cigars. Improved pricing and temporary cost reductions in anticipation of weaker volumes resulted in considerably higher margins in the US. In Europe, sales declined in local currencies, in line with volume declines. Operating margin for cigars was 24.9 percent (20.2).
Group operating profit for the second quarter increased by 30 percent to 899 MSEK (691). Currency translation has affected the operating profit comparison positively by 116 MSEK. In local currencies, operating profit increased by 13 percent.
Operating margin for the second quarter amounted to 24.5 percent compared to 21.8 percent for the second quarter of 2008, the increase being driven by the unusually strong margin in the cigar business, as well as continued growth in the snuff businesses.
Basic earnings per share for the second quarter amounted to 2.51 SEK (1.89). Basic earnings per share including discontinued operations amounted to 2.68 SEK (2.04).
[b]Sales and results for the first six months[/b]
Sales for the first six months amounted to 7,053 MSEK (5,857). In local currencies, sales increased by 6 percent. Operating profit amounted to 1,693 MSEK (1,186). Currency translation has affected the operating profit comparison positively by 224 MSEK.
Group operating margin during the first six months was 24.0 percent (20.3).
The reported tax rate for the Group for the first six months was 22 percent (18).
EPS (basic) for the first six months was 4.63 SEK (3.09), while diluted EPS was 4.62 SEK (3.08). EPS (basic) for the first six months including discontinued operations was 4.95 SEK (3.40), while diluted EPS was 4.95 SEK (3.39).
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* The capital gain is attributable to the product area other operations
Total sales and operating profit of the Group's reportable segments reconcile to the Group's total sales and operating profit for the periods. In order to arrive at the profit before tax of 791 MSEK (574) for the second quarter and 1,478 MSEK (957) for the first half year, the net finance cost of 108 MSEK (117) and 215 MSEK (230) respectively needs to be deducted.
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[b]Snuff/Snus[/b]
Sweden is the world's largest snuff market measured by per capita consumption. A substantially larger proportion of the male population uses the Swedish type of moist snuff called snus1 compared to cigarettes. The Norwegian market is smaller than the Swedish market but has in recent years experienced strong volume growth. The US is the world's largest snuff market measured in number of cans and is approximately six times larger than the Swedish market. In Sweden and Norway, Swedish Match has a leading position. In the US, the Group is well positioned as the third largest player. Some of the best known brands include General, Ettan and Grov in Sweden, and Red Man, Timber Wolf and Longhorn in the US.
During the second quarter, sales increased by 17 percent compared to the same quarter of the previous year, to 1,087 MSEK (926), and operating profit increased by 15 percent to 463 MSEK (403). Sales and operating profit improved in Scandinavia as well as in the US. The operating margin for the total product group was 42.6 percent (43.6).
In Scandinavia, sales volumes measured in number of cans, increased by 6 percent during the second quarter compared to the second quarter of the previous year, as volumes increased in all markets (Sweden, Norway and Travel Retail). Sales revenues in Scandinavia grew by 8 percent in the second quarter, while operating profit grew by 5 percent as the production costs increased somewhat more than the net sales price per can. Since February, General White Portion snus has been available throughout Sweden in an upgraded "star formation" packaging, following the successful introduction of this redesign initiative in Norway in 2008. This new packaging has been well received in Sweden, and the product has gained volume during the quarter.
In the US, sales volumes during the second quarter were unusually strong and up by 21 percent compared to the same period in the previous year. Sales volumes toward the end of the first quarter of 2009 declined sharply due to trade destocking related to the US federal excise tax increase. This was reversed in the second quarter. Swedish Match consumer volumes as measured by ACNielsen for the year to date period through June 13 increased by 9.2 percent compared to the same period of the previous year. Market growth in the same period was 2.3 percent according to ACNielsen. The strong shipment volumes were a contributor to the sales and operating profit growth in the US snuff business.
From April 1, excise taxes in the US increased by 91.5 cents per pound (about 7 cents per can for most products). Swedish Match maintained pricing for most of the quarter, thus absorbing the tax increase. On June 23, Swedish Match snuff prices were increased by 7-10 cents per can, thereby compensating for the tax increase going forward and reverting to net prices closer to the levels before the increase.
For the first six months of the year, sales increased to 2,055 MSEK (1,727) and operating profit increased to 860 MSEK (716). Operating margin was 41.8 percent (41.5).
1 Swedish snus is moist snuff which is produced using a special heat treated process, much like pasteurization, as opposed to other snuff products for which a fermentation process is used.
[b]Cigars[/b]
Swedish Match is one of the world's largest producers of cigars and cigarillos. Swedish Match offers a full range of different cigars and brands. Well known brands include Macanudo, La Gloria Cubana, White Owl, Garcia y Vega, La Paz, Hajenius, Hollandia, Justus van Maurik, Willem II and Salsa. The US is the largest cigar market in the world. Swedish Match has a leading position in the premium segment and is well established in the segment for machine made cigars. After the US, the most important cigar markets are in Europe, where Swedish Match is well represented in most countries. The largest markets for Swedish Match in sales terms in Europe are France, Benelux, Finland and Spain.
During the second quarter, sales were 1,129 MSEK (905), and operating profit amounted to 281 MSEK (183). In local currencies, sales in the second quarter were flat compared to the same period of the previous year, while operating profit increased by 22 percent. Operating margin was 24.9 percent (20.2).
During the second quarter, US premium cigar sales, which includes Internet and mail order, were down less than 1 percent from the previous year in local currency. During the first quarter of 2009 substantial hoarding of premium cigars occurred in connection with the federal excise tax increases. Much of this hoarding was reversed during the second quarter. Sales of mass market cigars in the US were negatively impacted by the first quarter hoarding as well, but the year on year volume decline of 6 percent in the second quarter was better than expected, mainly as a result of the strong performance of the "foil fresh" packaged small cigars. In anticipation of sharper volume declines, costs were reduced to below normal levels in the second quarter, which in combination with price increases resulted in a sharp increase of the operating profit and margin in this product area. Cigar sales in Europe declined somewhat in local currencies as a result of mix effects and lower volumes, particularly in France, Belgium, and the Netherlands.
For cigars in total, sales for the first six months amounted to 2,305 MSEK (1,659), while operating profit was 567 MSEK (294). In local currencies sales increased by 10 percent versus the previous year, while operating profit increased by 52 percent.
[b]Chewing tobacco[/b]
Chewing tobacco is sold primarily on the North American market, mainly in the southern US. Swedish Match is the leading producer of chewing tobacco in the US. Well known brands include Red Man and Southern Pride. The chewing tobacco segment shows a declining trend.
During the second quarter, sales increased by 39 percent, to 314 MSEK (227). In local currency, sales of chewing tobacco increased by 5 percent, as federal excise tax related restocking partially mitigated normal volume declines and price increases took effect. Operating profit increased by 67 percent, to 129 MSEK (77). In local currency, the operating profit increased by 26 percent. Operating margin was 41.0 percent (34.1).
Sales for the first six months amounted to 599 MSEK (437) while operating profit amounted to 227 MSEK (146). In local currency, sales for the first six months were up 3 percent, while operating profit grew by 17 percent. Operating margin was 38.0 percent (33.4).
During the second quarter, the Company began producing chewing tobacco as part of a production agreement with National Tobacco. Production will be fully up and running during the second half of the year.
[b]Lights[/b]
Swedish Match is the market leader in a number of markets for matches. The brands are mostly local, with leading positions in their home countries. Larger brands include Solstickan, Three Stars, Fiat Lux, and Redheads. The Group's main brand for disposable lighters is Cricket. Swedish Match's largest market for lighters is Russia.
During the second quarter sales amounted to 387 MSEK (371). In local currencies, sales declined by 4 percent. Operating profit amounted to 62 MSEK (63). Operating margin was 16.1 percent (17.1).
Sales for the first six months amounted to 764 MSEK (716), while operating profit amounted to 125 MSEK (119). Operating margin was 16.4 percent (16.6).
[b]Other operations[/b]
Other operations primarily include the distribution of tobacco products on the Swedish market, some sales of pipe tobacco and accessories, and corporate overhead costs.
Sales in other operations for the second quarter amounted to 749 MSEK (735). Operating loss for other operations was 36 MSEK (37).
Sales for the first six months amounted to 1,330 MSEK (1,318). Operating loss for the first six months was 85 MSEK (89).
[b]Taxes[/b]
In the first half of the year, the reported tax expense amounted to 327 MSEK (173), corresponding to a 22 percent tax rate (18). In Sweden the corporate tax rate was reduced from 28 percent to 26.3 percent as from January 1, 2009.
The increase in the tax rate compared to the full year 2008 (14.5 percent) is mainly attributable to significant positive one time reversals of tax provisions in 2008 and a tax exempt gain from the sale of the UK subsidiary in 2008. Currency movements also impact the tax rate as a large portion of profits are generated in the US where the Group's average tax rate is approximately 38 percent.
[b]Earnings per share[/b]
Basic earnings per share for the second quarter amounted to 2.51 SEK (1.89). Basic earnings per share including discontinued operations amounted to 2.68 SEK (2.04).
EPS (basic) for the first six months was 4.63 SEK (3.09), while diluted EPS was 4.62 SEK (3.08). EPS (basic) including discontinued operations for the first six months was 4.95 SEK (3.40), while diluted EPS was 4.95 SEK (3.39).
[b]Depreciation and amortization[/b]
In the first six months of the year, total depreciation and amortization amounted to 226 MSEK (207), of which depreciation on property, plant and equipment amounted to 164 MSEK (149) and amortization of intangible assets amounted to 61 MSEK (58). Amortization of intangible assets mainly pertains to trademarks.
[b]Financing and cash flow[/b]
Cash flow from operations for the first half of the year amounted to 1,300 MSEK compared with 578 MSEK for the same period of the previous year. Cash flow from operations in the first quarter of 2008 was negatively affected by timing differences in working capital and excise tax payments from the hoarding in the Swedish market at the end of 2007.
The net debt as per June 30, 2009, amounted to 7,770 MSEK compared to 7,640 MSEK at December 31, 2008. In the first half of the year, dividend payments of 1,024 MSEK and share repurchases, net, of 447 MSEK were made. Investments in property, plant and equipment in the first six months of the year amounted to 231 MSEK (133).
During the first half of the year new bond loans of 998 MSEK were issued by the Parent Company. In connection with this issuance, 900 MSEK of bond loans with shorter maturities were repurchased. Repayment of other loans during the same period amounted to 440 MSEK. As at June 30, 2009, Swedish Match Group had 9,262 MSEK of interest bearing debt excluding retirement benefit obligations. During the remainder of 2009, 224 MSEK of this debt falls due for repayment.
Cash and cash equivalents amounted to 2,547 MSEK at the end of the period, compared with 3,178 MSEK as of December 31, 2008. As of June 30, 2009, Swedish Match had 3,203 MSEK in unutilized committed credit lines.
Net finance cost for the first six months decreased to 215 MSEK (230).
[b]Average number of employees[/b]
The average number of employees in the Group during the first half of 2009 was 11,287 compared with 11,483 for the full year 2008.
[b]Share structure[/b]
The Annual General Meeting on April 28, 2009 approved a mandate to repurchase shares for a maximum amount of 3,000 MSEK until the next Annual General Meeting with the condition that the Company at any time does not hold more than 10 percent of all shares of the Company. In addition, in accordance with the resolution at the Annual General Meeting, 4.0 million shares held in treasury have been cancelled. The total number of registered shares in the Company after the cancellation of shares is 251,000,000.
After Annual General Meeting approval, the Company issued 1,716,948 call options to senior Company officials and key employees for the stock option program for 2008. These call options can be exercised from March 2012 to February 2014. The strike price is 141.24 SEK.
During the second quarter 4.1 million shares were repurchased for 496 MSEK at an average price of 121.45 SEK. Total shares bought back by Swedish Match since the buyback programs started have been repurchased at an average price of 80.39 SEK. During the first half of the year the Company sold 0.6 million treasury shares at an average price of 87.89 SEK as a result of option holders exercising options. As per June 30, 2009 Swedish Match held 5.4 million shares, corresponding to 2.1 percent of the total number of shares. The number of shares outstanding, net after repurchases and after the sale of treasury shares, as per June 30, 2009 amounted to 245.6 million. In addition, the Company has call options outstanding as of June 30, 2009 corresponding to 5.3 million shares exercisable in gradual stages from 2009-2014.
Other events and events following the close of the reporting period
Swedish Match and Philip Morris International announced in February that they have entered into an agreement to establish an exclusive joint venture company to commercialize Swedish snus and other smokefree tobacco products worldwide, outside of Scandinavia and the United States. The joint venture is based in Stockholm and the board of directors consists of six members, with three nominated by each company.
In February 2009, legislation was signed in the US to fund the State Childrens' Health Care Insurance Programs (SCHIP) through tobacco tax revenues (federal excise tax increases). The new federal excise tax rates became effective on April 1, 2009, and impacts both shipment volumes and consumption during 2009.
On June 22, 2009 a new law was signed in the US which grants the Food and Drug Administration (FDA) authority to regulate tobacco products. According to the legislation, payments of user fees, certain registrations as well as other requirements will be implemented starting in the second half of 2009.
On July 2, 2009, Swedish Match AB announced that it has reached an agreement to sell its South African operations, Swedish Match South Africa (Proprietary) Limited (SMSA) to Philip Morris International (PMI) for a purchase price amounting to 1.75 billion ZAR. The transaction is subject to approval by the South African Competition Authority and is expected to be completed during the second half of 2009. In 2008 the South African pipe tobacco and nasal snuff businesses had total sales of 687 million ZAR. SMSA will continue to distribute lighters, matches and cigars for Swedish Match.
[b]Outlook[/b]
In 2009, Swedish Match is taking further steps to drive value creation and growth to strengthen its position as a leading smokefree tobacco company while maintaining the strong commitment to profitability in other product categories. For the full year Swedish Match expects both the snuff market in Scandinavia and in the US to grow. For the second half of the year, Swedish Match expects Group sales and operating profit excluding larger one-time items to exceed prior year.
The Group maintains its long term financial strategy and dividend policy, and Swedish Match remains committed to returning cash not needed in operations to shareholders.
The tax rate from continuing operations for 2009, excluding one-time items (such as the tax free capital gain from the sale of the South African business), is estimated to be around 22 percent.
[b]Risk factors[/b]
Swedish Match faces intense competition in all of its markets and for each of its products and such competition may increase in the future. In order to be successful the Group must promote its brands successfully and anticipate and respond to new consumer trends. Restrictions on advertising and promotion may, however, make it more difficult to counteract loss of consumer loyalty. Competitors may develop and promote new products which could be successful, and could thereby have an adverse effect on Swedish Match's results of operations.
Swedish Match has a substantial part of its production and sales in EMU member countries as well as in Brazil and the US. Consequently, changes in exchange rates of euro, Brazilian real and the US dollar in particular may adversely affect the Group's results of operations, cash flow, financial condition or relative price competitiveness in the future. Such effects may occur both in local currencies and when such local currencies are translated into Swedish currency for purposes of financial reporting.
Regulatory and fiscal changes related to tobacco and other taxes, as well as to the marketing, sale and consumption of tobacco products, in the countries where the Group is operating may have an adverse effect on Swedish Match's results of operations.
For a further description of risk factors affecting Swedish Match, see the Report of the Board of Directors in the published Swedish Match Annual Report for 2008.
[b]Swedish Match AB (publ)[/b]
Swedish Match AB (publ) is the Parent Company of the Swedish Match Group.
Sales in the Parent Company for the first six months amounted to 1 MSEK (1). Profit before income tax amounted to 1,596 MSEK (602) and profit for the first six months amounted to 1,799 MSEK (858). The main sources of income for the Parent Company are dividends and Group contributions from subsidiaries. During the period the Parent Company received dividends amounting to 2,354 MSEK (1,521).
Part of the Group's treasury operations are included in the operations of the Parent Company and include the major part of the Group's external borrowings. Some of these loans have variable interest rates and a change of interest rates could impact the result of the Parent Company.
Capital expenditures during the first six months amounted to 0 MSEK (0). The cash flow for the period was negative 2,676 MSEK (negative 743). Cash and bank at the end of the period amounted to 26 MSEK compared with 2,702 MSEK at the beginning of the year. During the first six months the Parent Company made share repurchases, net, of 447 MSEK and paid dividend of 1,024 MSEK.
[b]Accounting principles[/b]
This report is prepared in accordance with the Accounting Standard IAS 34 Interim Financial Reporting. The Annual Account Act and the Securities Markets Act have also been applied. The report of the Parent Company is prepared in accordance with the Annual Account Act and the Securities Markets Act which is in accordance with the rules of RFR 2.2 Accounting for Legal Entities issued by the Swedish Financial Reporting Board.
New accounting standards, changes of standards and interpretations applicable from January 1, 2009 as detailed below have been applied in this report:
IFRS 8 operating segments sets out the definition of operating segments and requirements for disclosure in the financial reports. Swedish Match monitors and makes decisions about operating matters based on product areas. The reportable segments for Swedish Match are snuff, cigars, chewing tobacco, lights and other operations. The South African operations account for the major part of the total Swedish Match pipe tobacco and accessories business and following the reporting of the South African operations as discontinued, the classification of segments has changed. The continuing pipe tobacco and accessories operations are no longer reported in a separate segment but instead included in other operations and the discontinued operations are excluded from the segment reporting. Due to the changed classification of operating segments, prior periods have been restated. There are no internal sales between operating segments and the Group's financial costs as well as taxes are not allocated to product areas. Operating assets are not monitored on a segment basis.
Amendments to IAS 1 Presentation of financial statements set out a revised presentation of owner changes in equity and of comprehensive income. The revision does not change the recognition, measurement or disclosure of specific transactions.
Amendments to IAS 23 Borrowing costs set out that borrowing costs directly pertaining to acquisition, construction or production of an asset that takes a substantial time to complete shall be capitalized. The amendment has not had a material impact on the financial report.
In all other respects the accounting principles are the same as in the 2008 Annual Report.
[b]Forward-looking information[/b]
This report contains forward-looking information based on the current expectation of the Swedish Match Group's management. Although management deems that the expectations presented by such forward-looking information are reasonable, no guarantee can be given that these expectations will prove correct. Accordingly, the actual future outcome could vary considerably compared to what is stated in the forward-looking information, due to such factors as changed conditions regarding business cycles, market and competition, changes in legal requirements and other political measures, and fluctuation in exchange rates. Enditem
