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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 fourth quarter, sales revenues declined by 8 percent, to 222 MSEK (240). In local currency, sales of chewing tobacco on the North American market increased. As a result of the weaker USD, operating profit declined by 1 percent, to 75 MSEK (76). Operating margin was 34.1 percent (31.7).
Sales for the full year amounted to 956 MSEK (1,063) while operating profit amounted to 312 MSEK (338). In the US, sales for the full year were down less than 2 percent, while operating profit was up 1 percent in local currency. Operating margin was 32.7 percent (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 in most established markets.
During the fourth quarter, sales revenues declined by 1 percent to 223 MSEK (226) and the operating profit declined to 58 MSEK (63). The sales and operating profit comparisons are affected by the depreciation of the South African Rand. Operating margin was 25.9 percent (28.0).
Sales for the full year amounted to 851 MSEK (899), while operating profit amounted to 201 MSEK (265). Operating profit during full year was negatively affected by the weaker South African Rand and costs related to the closure of a redundant pipe tobacco factory in South Africa during the second quarter 2007. Operating margin was 23.6 percent (29.5).
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 fourth quarter sales revenues amounted to 405 MSEK (388), while operating profit amounted to 67 MSEK (51). Operating margin was 16.4 percent (13.1).
Sales for the full year amounted to 1,473 MSEK (1,503), while operating profit amounted to 252 MSEK (249). Currency translation has impacted sales and operating profit positively. Operating margin was 17.1 percent (16.6).
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 fourth quarter amounted to 769 MSEK (784). Operating profit for Other operations was a negative 41 MSEK (negative 9). During the full year, sales in Other operations were 2,571 MSEK (2,677), while operating profit was a negative 137 MSEK (negative 99). 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. From the fourth quarter 2007, costs in Other operations increased on higher rental expenses following the sale of the head office buildings in Stockholm.
Taxes
The Group tax expense for the full year amounted to 606 MSEK (838), corresponding to a tax rate of 22.8 percent (26.4). There was no income tax expense on the gain on the sale of the head office buildings in Stockholm. In 2007 a realignment of the operational and legal structures has resulted in a more effective capital structure and thus a lowered tax rate. In 2006 the tax expense was favourably impacted by the reversal of a provision for withholding tax on unremitted earnings from US subsidiaries of 125 MSEK.
Earnings per share
Earnings per share for the year amounted to 7.82 SEK (8.13). Last year’s earnings per share was positively affected by the one time pension plan curtailment gain, reversal of the tax provision as well as the one time gain on investments. Earnings per share for 2007 were favorably impacted by the gain from the sale of the head office buildings in Stockholm.
Depreciation and amortization
Total depreciation and amortization for the full year amounted to 435 MSEK (446), of which depreciation on property, plant and equipment amounted to 300 MSEK (314) and amortization of intangible assets amounted to 135 MSEK (132).
Financing and cash flow
Cash flow from operations for the year increased to 2,327 MSEK compared with 1,335 MSEK for the previous year. Tax payments during the year were 410 MSEK, compared with unusually high 1,732 MSEK during 2006.
The net debt as per December 31, 2007 amounted to 7,127 MSEK compared to 5,658 MSEK at December 31, 2006. The increase of 1,469 MSEK includes share repurchases, net, of 2,453 MSEK, payment of dividends of 664 MSEK and the acquisitions of Bogaert Cigars and Cigars International of 1,250 MSEK. The proceeds from the sale of the Stockholm head office buildings amounted to cash inflow of 1,085 MSEK and investments in property, plant and equipment amounted to 541 MSEK.
During the year new bond loans of 2,250 MSEK have been issued. Payments of bond loans for the same period amounted to 300 MSEK.
Cash and cash equivalents amounted to 3,439 MSEK at the end of the period, compared with 3,042 MSEK at the beginning of the year.
Net finance cost for the full year increased to 336 MSEK (112) as a result of a gain on the sale of securities of 111 MSEK in 2006 as well as higher net debt and increased interest rates.
Revised dividend and financial policy
In conjunction with the publication of the results for the third quarter, the Board announced a change to the dividend and the financial policy of the Company. The Board concluded that the strategic position of Swedish Match supports a modified dividend policy and raised the targeted pay-out ratio to 40 to 60 percent of the earnings per share for the year, subject to adjustments for larger one time items.
The Board further concluded that in view of the good and stable prospects for the business as well as the additional contribution that recently acquired companies are expected to generate, the financial policy should be that the Company will strive to maintain a net debt that does not exceed three times EBITA.
The Board continually reviews the financial position of the Company, and the actual level of net debt will be assessed against anticipated future profitability and cash flow, investment and expansion plans, acquisition opportunities as well as the development of interest rates and credit markets. The Board remains committed to maintain an investment grade credit rating.
Proposed dividend per share
The Board proposes an increased dividend to 3.50 SEK (2.50), equivalent to 45 percent (31) of the earnings per share for the year. The proposed dividend amounts to 896 MSEK based on the 255.9 million shares outstanding at the end of the year.
Tobacco tax
During the year Swedish Match’s payments of tobacco tax in Sweden increased to 9.4 billion SEK (8.2).
Average number of Group employees
The average number of employees in the Group during the full year 2007 was 12,075 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 billion SEK. In addition, a decision was made to cancel 13.0 million shares held in treasury, with a contemporaneous bonus issue without issuing new shares of an amount equivalent the amount represented by the cancelled shares or