Distinguished shareholders,
You own a unique company in the tobacco industry.
During the past few years, the industry has undergone major structural changes through acquisitions and mergers. Swedish Match has succeeded in turning these challenges into a business opportunity that has provided the platform for our present and future strength, particularly in smokeless products and cigars.
Swedish Match generates a strong cash flow, which we have used for profitable acquisitions in the cigar and pipe tobacco product areas. Surplus funds have been distributed to shareholders through share buybacks and dividends. In addition, we can report excellent growth in the snuff product area, in terms of both sales and earnings. In combination, these strategies have produced high returns for you as shareholders.
Permit me to continue by presenting a more detailed picture of todays Swedish Match, after which I will comment on the past year, briefly touch on developments during the first quarter and conclude with some thoughts about the future.
Sales during the past year amounted to SEK 13 billion. Today Swedish Match is an international company whose brands and products are distributed to millions of consumers in 140 countries. The company has approximately 15,000 employees.
We have concentrated on building a broad portfolio with leading and strong positions in many markets. Many of our brands occupy niches that are growing within the industry. Thanks to our international reach, we can exploit market potential on a global scale, which is a significant future competitive advantage.
Our main growth product, snuff, has historically shown a strong volume increase, and sales during the past year amounted to SEK 3 billion.
Swedish Match is the only company that has international operations in the main markets for snuff. We are the market leader in the Nordic region and number two in South Africa. We are number three in the US market, where we have been increasing our market share for a number of years.
Over a five-year period, sales have increased by an average of 18 percent per year, while operating income has increased by 17 percent per year.
Snuff production in Sweden takes place at our plants in Gothenburg and Kungälv. We also produce snuff for the North American market in Owensboro, Kentucky, in the US, and for the South African market in Boksburg, on the outskirts of Johannesburg.
In Sweden, snus has undergone a unique change of status after once having lagged far behind cigarettes in sales terms, the product has staged a fantastic comeback and more than doubled its sales volumes since 1970. Today, snus is accepted in all social classes and is used by both men and women. About half of the roughly 1 million users are former smokers, and women make up a substantial proportion.
The US is the worlds largest snuff market about four times the size of the Scandinavian market. The total market is growing and currently amounts to approximately 880 million cans. As you can see, our sales and share of the total market have increased each year, and our market share is currently around 9 percent.
Timber Wolf is a strong brand that has been on the market for nine years. Longhorn, a new brand launched last year, was favorably received by consumers.
In South Africa, we sell nasal snuff under the Taxi brand, following our acquisition of the family company Leonard Dingler in 1999.
As a result of our acquisitions in the US, Swedish Match is today the worlds second largest cigar company, with some 30 brands that are sold in more than 90 countries. Annual sales amount to around SEK 3 billion.
Production of cigars takes place at plants in Belgium, Indonesia, Alabama (USA), Honduras and the Dominican Republic.
Swedish Match markets a broad range of cigars in the US. Demand for flavored cigars is increasing, and we have launched a number of new product variants with considerable success within the framework of the White Owl brand. Volumes are increasing a trend that has strengthened during the first quarter of this year.
In the exclusive market for hand-rolled cigars, Swedish Match is the largest in the US, with a market share of approximately 25 percent. The main brand is Macanudo, the worlds top-selling premium cigar. But we also have a number of other classic brands, such as Partagas, La Gloria Cubana and Hoyo de Monterrey.
Cigar sales in Europe are dominated by machine-made products, and Swedish Matchs market share is about 15 percent. Our La Paz cigar is one of the better-known brands in Europe.
With our strong Red Man brand, we are among the leaders in the North American market for chewing tobacco. Another of our brands, Southern Pride, which we introduced in 1998, has shown a favorable volume trend.
We are one of the worlds leading players in the pipe tobacco product area, with a number of well-known brands. Borkum Riff is one of the worlds best-known brands, with which we have achieved export successes in Asia and other regions.
Other strong pipe tobacco brands are Boxer and Best Blend in South Africa and Half and Half in the US. South Africa is the largest single market. Together, these two product areas account for a sales value of SEK 2 billion.
We supply consumers in 140 countries with our matches and lighter products. We have major production facilities in a number of countries, as shown in these slides.
The brands for matches, while often local, are very strong. Some examples are Solstickan in Sweden and Three Stars in a number of other countries.
In the lighters product area, Cricket is the best-known brand.
The combined sales value for matches and lighters amounts to SEK 2 billion.
Permit me to say a few words now about the Swedish Match share. Earnings per share increased from SEK 2.26 in 1999 to SEK 4.68 in 2003, an average growth rate of 20 percent per year.
This increase in earnings has contributed to a highly favorable price trend for the share. The percentage increase in the share price has shown a considerably more favorable trend than the index for Stockholmsbörsen. During the past five-year period, from April 1999 to April 2004, an investment in Swedish Match has generated a price gain of 190 percent. During 2003, the share price rose 7 percent. No other company in Stockholmsbörsens list of the most actively traded shares has matched this performance.
Today, Swedish Match has nearly 95,000 shareholders.
Among our largest shareholders are the Swedish mutual fund companies Alecta and Robur and three of the AP funds. Fund managers outside Sweden include Fidelity, Janus and Wellington in the US. Foreign ownership is concentrated to the US and the UK and currently amounts to 63 percent.
Dividends and the share buyback program are key elements in our strategy for creating shareholder value. We have an explicit philosophy to the effect that capital not required for operations should be returned to shareholders through buybacks and dividends.
Including this years dividend, a total of SEK 7.2 billion has been transferred to shareholders in the form of dividends, share redemption programs and buybacks during the period from 1999 up to and including 2003.
Dividends have steadily increased. An increase of SEK 0.10 to SEK 1.70 is proposed for 2003.
Following this review, I would like to comment briefly on developments during 2003.
- Sales declined by 4 percent to 13,036 MSEK, but increased by 3 percent in local currency.
- Operating income declined by 6 percent to 2,224 MSEK, but increased by 3 percent in local currency.
- Net income rose 9 percent to 1,558 MSEK.
- Overall, earnings per share increased by 14 percent to SEK 4.68.
Now for some comments on the individual product areas:
Snuff continued to show favorable growth in Sweden and the US, with volume increases of 4 percent and 5 percent respectively, in terms of numbers of cans sold. Sales rose 7 percent to 2,995 MSEK. Both operating income and the operating margin improved.
Sales of cigars declined by 9 percent, mainly due to currency effects.
Operating income was down 25 percent, largely due to a weak start to the year combined with currency effects and certain restructuring costs in Europe.
Although consumption of chewing tobacco and pipe tobacco is declining, these product areas still generate favorable earnings and strong cash flows thanks to the strength of the brands. The figures for chewing tobacco were affected by the weakness of the dollar, while the strengthening of the rand in South Africa had a positive effect on pipe tobacco.
Both match and lighter operations are exposed to tough price competition, and volumes declined in a number of markets. The product areas are currently undergoing a restructuring program and profit margins have come under pressure a trend that is expected to continue for several more quarters.
Today we can also present developments during the first quarter of 2004. Sales amounted to 3,002 MSEK, on par with last year. In local currency, sales rose 5 percent. The first quarter includes a number of nonrecurring items, such as:
- revenue of 200 MUSD resulting from a settlement in a claim for damages against the American snuff producer US Tobacco,
- restructuring costs of 46 MSEK relating to the European match operations.
Excluding nonrecurring items, operating income improved by 535 MSEK an increase of 19 MSEK during the first quarter. In local currency, income improved by 48 MSEK. So we have had a good start to the current year.
The Future
The major portion of Swedish Matchs earnings derives from sales in markets where we hold leading positions, meaning the Nordic countries, the US, South Africa and Brazil, to name the most important of these markets. In the future, we plan to orient our strategy toward strengthening our positions in these countries.
We are also constantly on the lookout for new business opportunities.
Since cigars are a classic luxury product, consumption in this product area tends to increase as living standards rise. This means that there is long-term potential in many markets, especially in Eastern Europe and Asia. But certain segments of the large European and North American cigar markets are also showing favorable growth. We plan to intensify our efforts in the area of new product launches.
Within the framework of our strategy for smokeless products, we are cultivating new markets for snuff in Russia and India. Last autumn, we initiated a consumer test in Tokyo of a new tobacco chewing gum, Firebreak, which offers an attractive alternative for smokers.
Our strategy has been formulated in harmony with trends in society. In various countries, smoking in public premises and workplaces is subject to increasing restrictions. In Sweden, we are the world leaders at reducing smoking, as well as having the lowest frequency of tobacco-related illness, despite the fact that tobacco use as a whole is as extensive here as in most other developed countries. Researchers call this phenomenon The Swedish Experience. Swedish Match is an important part of this trend, since snus is the main alternative for cigarette smokers who want to quit.
At present, the sale of snus is prohibited in the EU, with the exception of Sweden. The European Court of Justice is to begin an examination of the legality of the ban on June 8 this year, and its ruling is expected before year-end. Lifting of the ban would open up considerable potential. But we will also have to deal with trends and patterns of consumption that will take a long time to change, so it is important not to have unrealistically high expectations of rapid results.
To sum up:
You are the owners of a unique company in the tobacco industry. By focusing on organic growth, profitable acquisitions, ongoing efficiency-enhancement measures in our operations, and share buybacks, we have secured an extremely high return for you, our shareholders. We plan to continue with this strategy. Our product portfolio is well balanced and diversified. With your support, we will continue to build a sustainable and profitable enterprise.
Thank you for your attention.