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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 second quarter, sales revenues declined by 9 percent, to 253 MSEK (277). Operating profit grew by 1 percent, to 82 MSEK (81). In the US, sales were flat, and operating profit grew by 11 percent in local currency. Operating margin was 32.3 percent (29.3).
Sales for the first six months amounted to 492 MSEK (550) while operating profit amounted to 154 MSEK (167). In the US, sales for the first six months was down 1 percent, while operating profit grew by 2 percent in local currency. Operating margin was 31.2 percent (30.4).
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 second quarter, sales revenues decreased by 7 percent to 203 MSEK (218) and the operating profit declined to 24 MSEK (58). The sales and operating profit comparisons are affected by the sharp depreciation of the South African Rand. In addition, operating profit was negatively affected by 20 MSEK by the closure of a manufacturing facility. In local currencies, sales increased by 2 percent. Operating margin was 11.7 percent (26.5).
Sales for the first six months amounted to 408 MSEK (456), while operating profit amounted to 79 MSEK (133). Operating margin was 19.4 percent (29.2).
Lights
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 second quarter sales revenues amounted to 354 MSEK (368), while operating profit amounted to 62 MSEK (72). Operating margin was 17.5 percent (19.5).
Sales for the first six months amounted to 694 MSEK (755), while operating profit amounted to 119 MSEK (135). Operating margin was 17.1 percent (17.8).
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 second quarter was 638 MSEK (659). Operating profit for Other operations was a negative 29 MSEK (negative 17). During the first six months, sales in Other operations was 1,121 MSEK (1,170), while operating profit was a negative 74 MSEK (negative 55). Sales in the Swedish distribution of tobacco products was 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.
Taxes
Following the divestitures and restructuring measures over the past few years the Company has identified a need to better align the legal and operational structures. This has also resulted in a more efficient capital structure of the Group and the tax expense for the first six months amounted to 258 MSEK (473), corresponding to a tax rate of 25 percent (30).
Depreciation and amortization
Total depreciation and amortization amounted to 217 MSEK (221), of which depreciation on property, plant and equipment amounted to 152 MSEK (157) and amortization of intangible assets amounted to 65 MSEK (64).
Financing and cash flow
At the close of the period the Group’s net debt amounted to 8,235 MSEK, as compared to 5,658 MSEK on December 31, 2006, an increase of 2,577 MSEK. The definition of net debt now includes the net of pension plan assets and liabilities. As of December 31, 2006 and June 30, 2007 net pension liabilities of 532 MSEK and 521 MSEK respectively are included in net debt. The increase in net debt during the first half of the year is primarily due to share repurchases, net, of 1,853 MSEK, payment of dividends of 664 MSEK and investments of 607 MSEK.
Cash flow from operations was 571 MSEK compared with a negative 310 MSEK previous year. Tax payments during the first half of the year were 325 MSEK, compared with unusually high 1,308 MSEK in the first six months of 2006. The cash flow from change in working capital has been negatively impacted by unusually high payments of tobacco excise taxes as a result of exceptionally strong sales of snuff in Sweden and in the Swedish distribution of tobacco products at the end of 2006 in anticipation of the sharply increased tobacco excise taxes effective January 1, 2007.
Cash flow from investing activities amounted to an outflow of 607 MSEK (outflow 958) and direct investments in property, plant and equipment amounted to 289 MSEK (124).
During the period new bond loans of 1,050 MSEK have been issued. Amortization for the period amounted to 310 MSEK.
Cash and cash equivalents amounted to 1,288 MSEK at the end of the period, compared with 3,042 MSEK at the beginning of the year.
Net finance cost for the period amounted to a 145 MSEK (87).
Tobacco tax
During the first six months of 2007 Swedish Match’s payments of tobacco tax in Sweden have increased to 4.1 billion SEK (3.7).
Average number of Group employees
The average number of employees in the Group during the first half of 2007 was 12,155 compared with 12,465 for the full year 2006.
Share structure
The Annual General Meeting on April 23, 2007 renewed the mandate to repurchase shares up to 10 percent of the shares of the Company until the next Annual General Meeting for a maximum amount of 3,000 MSEK. In addition, a decision was made to cancel 13.0 million shares held in treasury, with a contemporaneous bonus issue of an amount equivalent the amount represented by the cancelled shares or 18.1 MSEK. With the latter transaction the Company’s share capital did not decrease through the cancellation of shares. The total amount of registered shares in the Company after the cancellation of shares is 267,000,000 shares with a ratio value of 1.4589 SEK. In June, after Annual General Meeting approval, the Company issued 931,702 call options to senior Company officials and key employees for the stock option program for 2006. These call options can be exercised from March 1, 2010 to February 29, 2012. The exercise price is 145.50 SEK.
During the first six months 15.9 million shares were repurchased for 1,975 MSEK representing an average price of 123.91 SEK. As at June 30, 2007 Swedish Match held 7.0 million shares in its treasury, corresponding to 2.6 percent of the total number of shares. Total shares bought back by Swedish Match since the buyback programs started have been repurchased at an average price of 74.92 SEK. During the first six months the Company also sold 1.6 million treasury shares for 122 MSEK representing an average price of 75.95 SEK as a result of option holders exercising their options. The number of shares outstanding, net after repurchase and after the sale of treasury shares, as per 30 June, 2007 amounted to 260.0 million. In addition, the Company has call options outstanding as of June 30, 2007 corresponding to 3.4 million shares exercisable in gradual stages from 2007–2012.
Other events
On July 6, 2007, the Company announced that it had reached an agreement to sell a real estate company which is the owner of two buildings belonging to the Tobaksmonopolet property in Stockholm. Swedish Match will remain as one of the tenants in the divested buildings. The purchaser of the real estate is Aberdeen Property Fund Pan-Nordic and the purchase price is 995 MSEK. The closing date of the sale is scheduled to be on October 1, 2007. The capital gain on the sale is estimated to be in excess of 200 MSEK and will be recorded at the close of the transaction. In addition to the buildings involved in this transaction, two adjacent parcels of land continue to be held for sale.
Due to a prior listing on the American Nasdaq stock exchange, Swedish Match has been registered with the U.S. Securities and Exchange Commission (SEC) and therefore subject to extensive and costly SEC reporting obligations. Swedish Match has filed to deregister from the SEC.
Swedish Match AB (publ)
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 6 MSEK (7). Loss after financial items and before dividends from subsidiaries for the same period amounted to 262 MSEK (loss 315) and net loss to 192 MSEK (loss 267). The main sources of revenues for the parent company are dividends and Group contributions from subsidiaries. These are typically received at the end of the year.
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. Certain of these loans have variable interest rates and an increase of interest rates during the next six months would increase the interest expense in the parent company.