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Share structure
The Annual General Meeting on April 20, 2006 renewed the mandate to repurchase shares up to 10 percent of the shares of the Company. In addition, a decision was made to cancel 24.0 million shares held in treasury, with a contemporaneous bonus issue, without issuing new shares, of an amount equivalent to the amount represented by the cancelled shares or 28.8 MSEK. With the latter transaction the Company’s share capital did not decrease through the cancellation of shares. At an Extraordinary Meeting of the Shareholders on December 4, 2006 it was decided to cancel a further 20.6 million shares with a contemporaneous bonus issue, without issuing new shares, of an amount equivalent to the amount represented by these cancelled shares or 26.7 MSEK. The total number of registered shares of the Company, after the cancellations, is 280 million shares with a ratio value of 1.39 SEK. The Extraordinary Meeting of the Shareholders also renewed the mandate to repurchase shares up to an amount of 1,250 MSEK until the Annual General Meeting in April 2007. Of this amount 298 MSEK was utilized in January 2007.
In June, after Annual General Meeting approval, the Company issued 523,817 call options to senior management and key employees for the stock option program for 2005. These call options can be exercised from March 2, 2009 to February 28, 2011. The exercise price is 127.10 SEK.
During the year 32.9 million shares were repurchased at an average price of 111.57 SEK. As at December 31, 2006 Swedish Match held 5.6 million shares in its treasury, corresponding to 2.0 percent of the total number of shares. Total shares bought back by Swedish Match since the buyback programs started in 2000 have been repurchased at an average price of 69.15 SEK. During the year the Company has also sold 1.4 million treasury shares as a result of option holders exercising their options. The number of shares outstanding, net after repurchase and after the sale of the treasury shares as per year end amounted to 274.4 million. In addition, the Company has call options outstanding at year end corresponding to 4.0 million shares exercisable in gradual stages from 2007–2011.
The Board will propose to the Annual General Meeting in April 2007 a renewed mandate to repurchase shares of the Company up to an amount of 3 billion SEK until the next Annual Meeting in 2008. In addition a proposal will be made to cancel shares held in treasury with a contemporaneous bonus issue without issuing new share of an amount equivalent to the reduction of share capital through the cancellation of shares.
Personnel
The average number of employees in the Group during the year was 12,465 compared with 14,333 for 2005. The decrease in the number of employees is mainly due to divested operations and rationalizations. For further information see chapter on Human Resources on page 32.
Environmental impact
Swedish Match strives to conduct its business in a manner that does not put the environment at risk and in compliance with relevant environmental legislation, regulations and other local requirements.
To support the environmental efforts Swedish Match has a Group Environmental Policy and has also established a Swedish Match Environmental Management System. The search for items with a possible negative environmental impact originates at the factory level and is coordinated by the divisions. In order to reduce the environmental impact targets are set and remedial actions are taken according to an agreed upon program. The progress of the remedial actions according to the programs is monitored centrally. Swedish Match strives to make improvements in areas with environmental impact, such as water and energy consumption and waste management.
Swedish Match actively works to have its production plants certified according to ISO 14001. At present, plants representing 80 percent of sales are certified.
Permits and obligatory reporting
All plants satisfied the requirements of their permits during 2006. The snus plants in Gothenburg and Kungälv in Sweden are subject to obligatory reporting in accordance with the Swedish Environmental Code.
The plant in Vetlanda, Sweden produces matchsticks and boxes with striking surfaces that are used in match production. These operations require a permit in accordance with the Environmental Protection Act. The permit is valid indefinitely. Noise levels, storage of timber and solvent emissions are regulated.
The plant in Tidaholm in Sweden produces matches, firestarters and match heads. These operations require a permit according to the Environmental Protection Act. The permit entitles the plant to increase production up to certain levels and specifies limits for wastewater, the dust content in ventilation outflows and noise levels.
For plants in other countries where Swedish Match has production operations, the Group has permits in accordance with the legislation in each country.
Risk factors
Developed markets for some tobacco products have been generally declining in the past decades. Increasing health concerns related to tobacco smoking followed by increasingly severe restrictions on smoking in public places and in the workplace is evident in most countries where the Group sells its products. Tobacco products are also subject to substantial taxes in most countries where Swedish Match has significant sales. In many of those countries, the taxes on tobacco are generally increasing but the rate of increase varies between different types of tobacco products. Increased excise taxes or changes in relative tax rates for different tobacco products may impact overall sales volume for the Company’s products.
The Company is involved in legal and regulatory proceedings including pending lawsuits related to intellectual property rights and alleged injuries caused by tobacco products. There can be no assurance that the Company’s defences will be successful in trial and substantial costs may be incurred in defending lawsuits. Although management cannot in any meaningful way estimate the damages that might be awarded, if any, in any ongoing or anticipated disputes, such lawsuits individually or in the aggregate, could have an adverse effect on the Company’s results of operations.
Swedish Match has substantial operations in emerging or developing markets such as Brazil, the Dominican Republic, Honduras, Indonesia, the Philippines and South Africa. Swedish Match’s results of operations and financial condition are influenced by the economic, regulatory and geopolitical situations in the countries in which it has operations, which can be unpredictable and outside the control of the Group.
For a more detailed description of the Group’s financial risk management and holdings of financial instruments, see Note 26, page 63.
Other events
In January, 2006, the Company sold its Arenco subsidiary. Arenco manufacture machines for match manufacturing and packaging in Kalmar and Halmstad, Sweden and Shanghai, China.
On March 31, 2006 the Company divested its advertising lights and accessories business.
On October 9, 2006, Standard & Poor’s lowered Swedish Match AB’s long term credit rating from A- to BBB+ with a negative outlook. Swedish Match’s credit rating with Moody’s is Baa1 with stable outlook.
Swedish Match North America and Lorillard Tobacco Company have agreed to jointly develop and market a selected line of smokeless tobacco products in the United States. The parties anticipate that an initial product offering may be launched on some basis of geographic distribution in the not too distant future. Lorillard Tobacco Company is the third largest manufacturer of cigarettes in the United States, with brands such as Newport, the best selling menthol cigarette in the country, Maverick, Old Gold, Kent and True. Lorillard is a wholly owned subsidiary of Loews Corporation, a NYSE company (LTR).
Outlook
Swedish Match’s strategic orientation holds firm. The Company will continue working with measures to stimulate organic growth particularly for moist snuff and cigars. The work of strengthening the Company’s established brands and launching new brands continues. The search for suitable acquisitions within the cigar product area will be intensified.
In terms of results, 2006 was strong. Specifically for 2007, the results will be impacted by higher spending to drive organic growth and the unwinding of hoarding of snuff in Sweden in 2006 ahead of the excise tax increase. The operating margin for snuff will also be impacted negatively by a general decline of consumption as a consequence of the tax increase, at least for the first half year.
The Board’s proposed distribution of earnings is presented on page 78.
Net sales and operating profit by product area  
           
            Operating
     Net sales   profit/loss
MSEK   2006 2005   2006 2005
Snuff   3,363 3,131   1,604 1,504
Cigars   3,407 3,283   747 613
Chewing tobacco   1,063 1,079   326 347
Pipe tobacco and            
Accessories   899 920   261 237
Lights   1,503 1,936   247 58
Other operations   2,677 2,962   –99 –140
Subtotal   12,911 13,311   3,087 2,618
Larger one time items            
Pension curtailment gain         148 –
Gain from sale of            
office property         – 206
Subtotal         148 206
Total   12,911 13,311   3,235 2,825
Summary of consolidated income statement  
MSEK 2006 2005
Net sales   12,911 13,311
Operating profit   3,235 2,825
Net finance cost   –68 –128
Taxes   –836 –919
Profit for the year 2,331 1,777
Attributable to      
Equity holders of the Parent   2,330 1,769
Minority interest   1 9
Earnings per share, SEK   8.12 5.61
Summary of consolidated balance sheet    
MSEK 2006 2005
Fixed assets   6,846 7,903
Inventories   2,473 2,770
Other current assets   3,354 2,475
Cash and cash equivalents and other investments   3,098 3,657
Total assets   15,770 16,806
Equity   2,290 5,083
Non-current liabilities and provisions   1,752 3,089
Non-current loans   7,815 2,867
Current liabilities and provisions   3,504 4,303
Current loans   409 1,464
Total equity and liabilities   15,770 16,806
Summary of consolidated cash flow statement  
MSEK 2006 2005
Net cash from operating activities 1,335 2,718
Net cash used in investing activities –255 –140
Net cash used in financing activities –1,164 –1,441
Net increase/decrease in cash and cash  
equivalents -85 1,137
Cash and cash equivalents at the    
beginning of the year 3,325 2,058
Effect of excange rate fluctuations on cash and cash    
equivalents –198 130
Cash and cash equivalents at end of year 3,042 3,325

Page 38


Share structure
The Annual General Meeting on April 20, 2006 renewed the mandate to repurchase shares up to 10 percent of the shares of the Company. In addition, a decision was made to cancel 24.0 million shares held in treasury, with a contemporaneous bonus issue, without issuing new shares, of an amount equivalent to the amount represented by the cancelled shares or 28.8 MSEK. With the latter transaction the Company’s share capital did not decrease through the cancellation of shares. At an Extraordinary Meeting of the Shareholders on December 4, 2006 it was decided to cancel a further 20.6 million shares with a contemporaneous bonus issue, without issuing new shares, of an amount equivalent to the amount represented by these cancelled shares or 26.7 MSEK. The total number of registered shares of the Company, after the cancellations, is 280 million shares with a ratio value of 1.39 SEK. The Extraordinary Meeting of the Shareholders also renewed the mandate to repurchase shares up to an amount of 1,250 MSEK until the Annual General Meeting in April 2007. Of this amount 298 MSEK was utilized in January 2007.
In June, after Annual General Meeting approval, the Company issued 523,817 call options to senior management and key employees for the stock option program for 2005. These call options can be exercised from March 2, 2009 to February 28, 2011. The exercise price is 127.10 SEK.
During the year 32.9 million shares were repurchased at an average price of 111.57 SEK. As at December 31, 2006 Swedish Match held 5.6 million shares in its treasury, corresponding to 2.0 percent of the total number of shares. Total shares bought back by Swedish Match since the buyback programs started in 2000 have been repurchased at an average price of 69.15 SEK. During the year the Company has also sold 1.4 million treasury shares as a result of option holders exercising their options. The number of shares outstanding, net after repurchase and after the sale of the treasury shares as per year end amounted to 274.4 million. In addition, the Company has call options outstanding at year end corresponding to 4.0 million shares exercisable in gradual stages from 2007–2011.
The Board will propose to the Annual General Meeting in April 2007 a renewed mandate to repurchase shares of the Company up to an amount of 3 billion SEK until the next Annual Meeting in 2008. In addition a proposal will be made to cancel shares held in treasury with a contemporaneous bonus issue without issuing new share of an amount equivalent to the reduction of share capital through the cancellation of shares.
 
Personnel
The average number of employees in the Group during the year was 12,465 compared with 14,333 for 2005. The decrease in the number of employees is mainly due to divested operations and rationalizations. For further information see chapter on Human Resources on page 32.
 
Environmental impact
Swedish Match strives to conduct its business in a manner that does not put the environment at risk and in compliance with relevant environmental legislation, regulations and other local requirements.
To support the environmental efforts Swedish Match has a Group Environmental Policy and has also established a Swedish Match Environmental Management System. The search for items with a possible negative environmental impact originates at the factory level and is coordinated by the divisions. In order to reduce the environmental impact targets are set and remedial actions are taken according to an agreed upon program. The progress of the remedial actions according to the programs is monitored centrally. Swedish Match strives to make improvements in areas with environmental impact, such as water and energy consumption and waste management.
Swedish Match actively works to have its production plants certified according to ISO 14001. At present, plants representing 80 percent of sales are certified.
 
Permits and obligatory reporting
All plants satisfied the requirements of their permits during 2006. The snus plants in Gothenburg and Kungälv in Sweden are subject to obligatory reporting in accordance with the Swedish Environmental Code.
The plant in Vetlanda, Sweden produces matchsticks and boxes with striking surfaces that are used in match production. These operations require a permit in accordance with the Environmental Protection Act. The permit is valid indefinitely. Noise levels, storage of timber and solvent emissions are regulated.
The plant in Tidaholm in Sweden produces matches, firestarters and match heads. These operations require a permit according to the Environmental Protection Act. The permit entitles the plant to increase production up to certain levels and specifies limits for wastewater, the dust content in ventilation outflows and noise levels.
For plants in other countries where Swedish Match has production operations, the Group has permits in accordance with the legislation in each country.
 
Risk factors
Developed markets for some tobacco products have been generally declining in the past decades. Increasing health concerns related to tobacco smoking followed by increasingly severe restrictions on smoking in public places and in the workplace is evident in most countries where the Group sells its products. Tobacco products are also subject to substantial taxes in most countries where Swedish Match has significant sales. In many of those countries, the taxes on tobacco are generally increasing but the rate of increase varies between different types of tobacco products. Increased excise taxes or changes in relative tax rates for different tobacco products may impact overall sales volume for the Company’s products.

Page 39

The Company is involved in legal and regulatory proceedings including pending lawsuits related to intellectual property rights and alleged injuries caused by tobacco products. There can be no assurance that the Company’s defences will be successful in trial and substantial costs may be incurred in defending lawsuits. Although management cannot in any meaningful way estimate the damages that might be awarded, if any, in any ongoing or anticipated disputes, such lawsuits individually or in the aggregate, could have an adverse effect on the Company’s results of operations.
Swedish Match has substantial operations in emerging or developing markets such as Brazil, the Dominican Republic, Honduras, Indonesia, the Philippines and South Africa. Swedish Match’s results of operations and financial condition are influenced by the economic, regulatory and geopolitical situations in the countries in which it has operations, which can be unpredictable and outside the control of the Group.
For a more detailed description of the Group’s financial risk management and holdings of financial instruments, see Note 26, page 63.
 
Other events
In January, 2006, the Company sold its Arenco subsidiary. Arenco manufacture machines for match manufacturing and packaging in Kalmar and Halmstad, Sweden and Shanghai, China.
On March 31, 2006 the Company divested its advertising lights and accessories business.
On October 9, 2006, Standard & Poor’s lowered Swedish Match AB’s long term credit rating from A- to BBB+ with a negative outlook. Swedish Match’s credit rating with Moody’s is Baa1 with stable outlook.
Swedish Match North America and Lorillard Tobacco Company have agreed to jointly develop and market a selected line of smokeless tobacco products in the United States. The parties anticipate that an initial product offering may be launched on some basis of geographic distribution in the not too distant future. Lorillard Tobacco Company is the third largest manufacturer of cigarettes in the United States, with brands such as Newport, the best selling menthol cigarette in the country, Maverick, Old Gold, Kent and True. Lorillard is a wholly owned subsidiary of Loews Corporation, a NYSE company (LTR).
 
Outlook
Swedish Match’s strategic orientation holds firm. The Company will continue working with measures to stimulate organic growth particularly for moist snuff and cigars. The work of strengthening the Company’s established brands and launching new brands continues. The search for suitable acquisitions within the cigar product area will be intensified.
In terms of results, 2006 was strong. Specifically for 2007, the results will be impacted by higher spending to drive organic growth and the unwinding of hoarding of snuff in Sweden in 2006 ahead of the excise tax increase. The operating margin for snuff will also be impacted negatively by a general decline of consumption as a consequence of the tax increase, at least for the first half year.
 
The Board’s proposed distribution of earnings is presented on page 78.
 
Net sales and operating profit by product area  
           
            Operating
     Net sales   profit/loss
MSEK   2006 2005   2006 2005
Snuff   3,363 3,131   1,604 1,504
Cigars   3,407 3,283   747 613
Chewing tobacco   1,063 1,079   326 347
Pipe tobacco and            
Accessories   899 920   261 237
Lights   1,503 1,936   247 58
Other operations   2,677 2,962   –99 –140
Subtotal   12,911 13,311   3,087 2,618
Larger one time items            
Pension curtailment gain         148 –
Gain from sale of            
office property         – 206
Subtotal         148 206
Total   12,911 13,311   3,235 2,825
 
Summary of consolidated income statement  
MSEK 2006 2005
Net sales   12,911 13,311
Operating profit   3,235 2,825
Net finance cost   –68 –128
Taxes   –836 –919
Profit for the year 2,331 1,777
Attributable to      
Equity holders of the Parent   2,330 1,769
Minority interest   1 9
Earnings per share, SEK   8.12 5.61
 
Summary of consolidated balance sheet    
MSEK 2006 2005
Fixed assets   6,846 7,903
Inventories   2,473 2,770
Other current assets   3,354 2,475
Cash and cash equivalents and other investments   3,098 3,657
Total assets   15,770 16,806
Equity   2,290 5,083
Non-current liabilities and provisions   1,752 3,089
Non-current loans   7,815 2,867
Current liabilities and provisions   3,504 4,303
Current loans   409 1,464
Total equity and liabilities   15,770 16,806
 
Summary of consolidated cash flow statement  
MSEK 2006 2005
Net cash from operating activities 1,335 2,718
Net cash used in investing activities –255 –140
Net cash used in financing activities –1,164 –1,441
Net increase/decrease in cash and cash  
equivalents -85 1,137
Cash and cash equivalents at the    
beginning of the year 3,325 2,058
Effect of excange rate fluctuations on cash and cash    
equivalents –198 130
Cash and cash equivalents at end of year 3,042 3,325