Report of the Board of Directors
SWEDISH MATCH AB (PUBL.) CORPORATE REGISTRATION NUMBER 556015-0756
Swedish Match is a global Group of companies with a broad range of market-leading brands of smokeless tobacco products, cigars, pipe tobacco and lights products. The Swedish Match share is listed on the OMX Nordic Exchange in Stockholm.
Net sales
Net sales for the year amounted to 12,551 MSEK (12,911). In local currencies, sales increased by 1 percent. Currency translation differences have affected sales comparisons negatively by 433 MSEK.
Sales of snuff amounted to 3,289 MSEK (3,363). In Scandinavia sales volumes decreased by 9 percent measured in number of cans. Volumes in Sweden decreased whilst volumes in Norway and tax free increased. Effective January 1, 2007 the excise tax on snus in Sweden doubled from 123 SEK per kilo to 246 SEK per kilo. The excise tax was increased again on January 1, 2008 by another 37 percent to 336 SEK per kilo. Altogether the excise tax for snus in Sweden has increased by 173 percent compared to the level in 2006. Hoarding in anticipation of tax increases on the Swedish market distorts volume comparisons between the years. In the United States sales grew as the Group gained market share in a growing market. The volumes increased by 21 percent.
Sales of Cigars totaled 3,411 MSEK (3,407). In local currencies, sales increased by 6 percent. 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. Bogaert has an annual turnover of approximately 20 MEUR. In September, the Group acquired Cigars International Inc., a US based distributor of premium cigars with annual sales of approximately 60 MUSD specializing in mail order and internet sales.
Chewing tobacco is sold primarily on the North American market. Sales decreased to 956 MSEK (1,063). In local currency sales decreased by less than 2 percent. Higher average prices compensated for volume declines. Sales for Pipe tobacco and accessories amounted to 851 MSEK (899). Currency effects, primarily from the South African rand, have affected sales negatively by 69 MSEK. For the Lights product area sales amounted to 1,473 MSEK (1,503).
Other operations
Other operations comprise the distribution of tobacco products in the Swedish market and corporate overheads.
Sales in Other operations were 2,571 MSEK (2,677) while operating result was a negative 137 MSEK (negative 99). 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.
Research and development
Swedish Match conducts a majority of its research and development in Sweden and the US, mainly related to the characteristics of the tobacco plant and tobacco. Costs of 73 MSEK (76) for research and development are included in the Group’s selling expenses, and of 9 MSEK (19) in cost of sales.
Operating profit
Operating profit for the year amounted to 2,997 MSEK (3,285). Operating profit, excluding larger one time items of a gain from sale of real estate in 2007 of 267 MSEK and a pension curtailment gain in 2006 of 148 MSEK, amounted to 2,730 MSEK (3,137). The lower operating profit is mainly due to lower Scandinavian snus volumes in the beginning of the year, higher marketing investments as well as currency translation effects. Currency translation has affected the operating profit comparison negatively by 117 MSEK.
Group operating margin for the full year was 23.9 percent (25.4). Group operating margin excluding larger one time items was 21.8 percent (24.3).
Net finance cost
Net finance costs 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 in 2007.
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 impacted 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.
Liquid funds
At the close of the fiscal year, cash and cash equivalents, together with other current investments, amounted to 3,444 MSEK compared to 3,098 at the beginning of the year.
In addition to cash and cash equivalents and other current investments, the Company had a confirmed line of credit totaling 250 MEUR at year end.
Financing and cash flow
Cash flow from operations for the year increased to 2,327 MSEK compared with 1,335 MSEK at December 31, 2006. 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 1.3 billion SEK. The proceeds from the sale of the Stockholm buildings amounted to a cash inflow of 1,085 MSEK. Investments in property, plant and equipment, including assets held for sale and biological assets, 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.
The Group’s main financing is effected through a Swedish medium-term note program of 4,000 MSEK and a global medium-term note program with a framework amount of 1,000 MEUR. Utilization of these programs amounted to 9,569 MSEK on December 31, 2007.
The net debt at year end divided by EBITA amounted to 2.5 (1.7). The interest cover ratio based on EBITA amounted to 9.0 (15.7).
Capital expenditure and depreciation
The Group’s direct investment in property, plant and equipment, including assets held for sale and biological assets, amounted to 541 MSEK (304) primarily in the moist snuff and cigars product areas. Proceeds from the sale of fixed assets amounted to 1,165 MSEK (100) including the sale of the Stockholm head office buildings. Total depreciation and amortization, including write-downs, amounted to 435 MSEK (446), of which depreciation on
| Net sales and operating profit by product area |
|
| |
|
|
|
| |
Net sales |
Operating profit/loss |
| MSEK |
2007 |
2006 |
2007 |
2006 |
| Snuff |
3,289 |
3,363 |
1,366 |
1,614 |
| Cigars |
3,411 |
3,407 |
737 |
770 |
| Chewing tobacco |
956 |
1,063 |
312 |
338 |
| Pipe tobacco and |
|
|
|
|
| accessories |
851 |
899 |
201 |
265 |
| Lights |
1,473 |
1,503 |
252 |
249 |
| Other operations |
2,571 |
2,677 |
–137 |
–99 |
| Subtotal |
12,551 |
12,911 |
2,730 |
3,137 |
| larger one time items: |
|
|
|
|
| Pension curtailment gain |
|
|
|
148 |
| Capital gain from sale of |
|
|
|
|
| real estate |
|
|
267 |
|
| Subtotal |
|
|
267 |
148 |
| Total |
12,551 |
12,911 |
2,997 |
3,285 |
| Summary of consolidated income statement |
|
| |
|
|
| MSEK |
2007 |
2006 |
| Net sales |
12,551 |
12,911 |
| Operating profit |
2,997 |
3,285 |
| Net finance cost |
–336 |
–112 |
| Taxes |
–606 |
–838 |
| Profit for the year |
2,056 |
2,335 |
| attributable to: |
|
|
| Equity holders of the Parent |
2,055 |
2,335 |
| Minority interests |
1 |
1 |
| Earnings per share, SEK |
7.82 |
8.13 |
| Summary of consolidated balance sheet |
|
|
| |
|
|
| MSEK |
2007 |
2006 |
| Fixed assets |
7,818 |
6,744 |
| Inventories |
2,520 |
2,473 |
| Other current assets |
2,685 |
3,355 |
| Cash and cash equivalents and other investments |
3,444 |
3,098 |
| Total assets |
16,467 |
15,670 |
| Equity |
724 |
2,041 |
| Non-current liabilities and provisions |
1,859 |
1,849 |
| Non-current loans |
8,768 |
7,815 |
| Current liabilities and provisions |
3,845 |
3,556 |
| Current loans |
1,271 |
409 |
| Total equity and liabilities |
16,467 |
15,670 |
| Summary of consolidated cash flow statement |
|
| |
|
|
| MSEK |
2007 |
2006 |
| Net cash from operating activities |
2,327 |
1,335 |
| Net cash used in investing activities |
–490 |
–255 |
| Net cash used in financing activities |
–1,426 |
–1,164 |
| Net increase/decrease in cash and cash |
|
|
| equivalents |
410 |
–85 |
| Cash and cash equivalents at the beginning of year |
3,042 |
3,325 |
| Effect of exchange rate fluctuations on cash and |
|
|
| cash equivalents |
–13 |
–198 |
| Cash and cash equivalents at end of year |
3,439 |
3,042 |
Consolidated Income Statement
