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March, 2008

U.S. Tobacco Cooperative

Swedish Match

Staff Report

While the world watches if the market outside of Scandanavia will take to snus, Swedish Match grows it’s cigar/cigarillo market and marches forward; a look at the international powerhouse

Swedish Match’s sales for the first nine months of calendar year 2007 amounted to 9,024 Mn Swedish Kroner, or MSEK (2006: 9,454). Operating profit amounted to 1,935 MSEK, down from 2,326 MSEK last year. The lower operating profit is mainly due to lower Scandinavian snuff volumes in the beginning of the year, as well as higher marketing investment.

The operating margin for snuff in the first quarter of 2007, and to a lesser extent in the second quarter, was significantly impacted by a sharp decline in volumes on the Swedish market, which were largely due to a doubling of the excise tax on snus. And with the announcement of a proposed further increase in the Swedish excise tax in January 2008, it is expected that hoarding and destocking effects, similar to that experienced between the fourth quarter 2006 and second quarter 2007, should be in store for the near future.

The outlook for the US snuff market remains firm in this past third quarter, and Swedish Match expects a “continued strong growth” in the fourth quarter. During the third quarter the cigar businesses of Bogaert Cigars and Cigars International were consolidated. Acquisition related costs and somewhat weaker prospects for the rest of the cigar business imply that the operating margin for cigars in the fourth quarter 2007 could be lower than the average for the year.

Here are a look at some other year-to-date results in key sectors:

Snuff /Snus
Sweden is the world’s largest snuff market measured by per capita consumption. In Sweden, a substantially larger proportion of the male population uses snus compared to cigarettes. The Norwegian market, which is significantly smaller than the Swedish market, is at present showing strong growth. The US is the world’s largest snuff market measured in number of cans and is approximately five times larger than the Swedish market. In Sweden and Norway, Swedish Match has a leading position. In the US, the company is well positioned as number three on the market. Some of the best known brands include General, Ettan, and Grov in Sweden, Timber Wolf and Longhorn in the US and Taxi in South Africa.

During the third quarter, sales revenues increased by 8% compared to the same quarter previous year, to 852 MSEK (2006: 785), and operating profit decreased by less than 1%, to 383 MSEK (2006: 385). Currency translation impacts have affected the sales and operating profit comparison negatively. Operating profit improved in the Scandinavian snus business. The company has increased spending (including launch related costs for Red Man moist snuff) which has resulted in a somewhat lower operating profit in the US snuff business. During the year, the company has increased its marketing and product development spending overall in the snuff product category for both the US and Scandinavian markets.

In Scandinavia, shipment volume in cans during the third quarter were down less than 1% compared to the same period of the previous year. The de-stocking effects from a hoarding in Sweden in the fourth quarter of 2006 have ended. Increased volumes in Norway and Duty free offset Swedish volume declines. In the US, overall shipment volumes in cans during the third quarter were up by 34% compared to the same period previous year. Volumes for Longhorn and Timber Wolf combined were up by 28%. Shipment volumes for the launch of Red Man moist snuff contributed to the overall volume increase. The Red Man launch was supported by extensive marketing efforts.

For the first nine months of the year, sales amounted to 2,308 MSEK (2006: 2,400) while operating profit amounted to 925 MSEK (2006: 1,151). Operating margin was 40.1% (2006: 48.0). The lower operating margin results from a combination of factors including lower volumes in the first half of the year in Scandinavia, a mix shift toward value price products, and higher marketing expenses for product launches.

Cigars
Swedish Match is the world’s second largest producer of cigars and cigarillos in sales value. 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, Justus van Maurik, Willem II, Salsa, and Wings. The US is the largest cigar market in the world where Swedish Match has a leading position in the premium segment and is well established in the segment for machinemade cigars. After the US, the most important cigar markets are in Europe, where Swedish Match is well represented in most countries, with an especially good market position in the Netherlands and in the Nordic area.

During the third quarter, sales revenues were 902 MSEK (2006: 903), while operating profit was 185 MSEK (2006: 231). Operating profit was positively impacted by the successful launch of the Garcia y Vega Game product on the US mass market. Currency translation has affected the comparisons for both sales and operating profit negatively. In local currencies, sales in the third quarter increased by 4% compared to the same period previous year, while operating profit declined. Operating margin decreased to 20.5% (2006: 25.6).

Excluding the impact of acquisitions, sales in local currencies were either unchanged or declined in all cigar segments compared to the third quarter previous year. Mix changes and higher marketing costs had a negative impact on the operating margins. The acquired businesses contributed positively to the result.

In mid June, Swedish Match acquired Bogaert Cigars, a privately held cigar company headquartered in Belgium with production facilities in Belgium and Indonesia. The Bogaert Cigars portfolio consists of machine-made cigars/cigarillos of own-brands (Bogart and Hollandia) as well as private label.

In September, the company acquired Cigars International Inc., a US-based distributor of premium cigars specializing in mail order and internet sales. This fast growing company has annual sales of approximately 400 MSEK, with its assortment including both General Cigar products and those from other manufacturers.

Group sales for the first nine months were 2,483 MSEK (2006: 2,550), while operating profit was 542 MSEK (2006: 602). In local currencies, sales increased by 3%, while operating profit declined by 5%, primarily attributable to a weaker performance in premium cigars.

Chewing tobacco
Chewing tobacco is sold primarily on the North American market, mainly in the southern US. Well known brands include Red Man and Southern Pride. Swedish Match is the leading producer of chewing tobacco in the US. The chewing tobacco segment shows a declining trend. During the third quarter, sales revenues declined by 11%, to 243 MSEK (2006: 273). Operating profit declined by 12%, to 83 MSEK (2006: 95). Operating margin was 34.3% (2006: 34.7). Lower volumes and negative currency translation effects were the main factors behind the decline in operating profit. Sales for the first nine months amounted to 734 MSEK (2006: 823) while operating profit amounted to 237 MSEK (2006: 262). In the US, sales for the first nine months were down 2%, while operating profit grew by 3% in local currency. Operating margin was 32.2% (2006: 31.8).

Pipe tobacco and Accessories
Swedish Match is one of the largest pipe tobacco companies in the world and its products are marketed worldwide. The Borkum Riff brand is sold in over 60 countries. The company has its most significant presence in South Africa, where local production takes place. Best Blend and Boxer are the most important brands in South Africa. Accessories include the sales of papers, filters, and other smoking related items, primarily in the UK and Australia. Pipe tobacco consumption is declining on most established markets. During the third quarter, sales revenues increased by 2% to 220 MSEK (2006: 217) and the operating profit declined to 64 MSEK (2006: 68). The sales and operating profit comparisons are affected by the depreciation of the South African Rand. Operating margin was 28.9% (2006: 31.5). Sales for the first nine months amounted to 628 MSEK (2006: 673), while operating profit amounted to 143 MSEK (2006: 202). Operating profit during the nine month period was negatively affected by costs related to the closure of a redundant pipe tobacco factory in South Africa during the second quarter. Operating margin was 22.7% (2006: 30.0).

Matches/Lighters
Swedish Match is the market leader in a number of markets for matches. The brands are mostly local, and have leading positions in their home countries. Larger brands include Solstickan, Three Stars, Fiat Lux, and Redheads. The company produces and distributes disposable lighters and the main brand is Cricket. Swedish Match’s largest market for lighters is Russia.

During the third quarter sales revenues amounted to 374 MSEK (2006: 360), while sales for the first nine months amounted to 1,068 MSEK (2006: 1,150).

Other operations
Other operations include primarily the distribution of tobacco products on the Swedish market, as well as corporate overheads. Sales in other operations for the third quarter were 682 MSEK (2006: 723). Operating profit for other operations was a negative 22 MSEK (2006: negative 35). During the first nine months, sales in other operations were 1,803 MSEK (2006: 1,892), while operating profit was a negative 96 MSEK (2006: negative 89). Sales in the Swedish distribution of tobacco products were unusually low in the beginning of the year as a consequence of high retailer inventories in anticipation of the sharply raised tobacco excise taxes effective January 1, 2007 and an overall decline in sales of tobacco products.


Tobacco International - March, 2008

SMOKE Magazine - Cigars, Pipes, and life's other desires


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