Ladies and gentlemen, shareholders and honored guests
Last year was a highly successful year for the Swedish Match Group. Sales and earnings improved and our financial position strengthened. The dividend will be increased if the Annual General Meeting approves the Board´s proposal.
We applied an aggressive strategy, building further on our already strong market positions in two of the tobacco industry´s growth segments - moist snuff and cigars. Our brand portfolio continued to develop well, with a number of successful launches. We also improved productivity, with continued restructuring measures in several product areas.
During the year, we followed up social and environmental issues to ensure that we are living up to our goals. Swedish Match strives to conduct its operations in a profitable and efficient manner, while simultaneously assigning high priority to ethical and moral issues and human rights. Within Swedish Match, awareness of social issues has always been an integral part of our corporate culture.
Swedish Match has a long history of high quality and transparency in corporate governance and control of its operations. Accordingly, compliance with the Swedish Code of Corporate Governance is a natural continuation of our established tradition.
During 2005, we increased the pace of product launches to further enhance our competitiveness.
During autumn of last year, we launched the luxury moist snuff brand Kardus in Sweden. Kardus is an exclusive moist snuff that is sold in specially selected stores and restaurants. General Onyx is the latest product in the General family. The new moist snuff variant is characterized by a distinctive flavor, sober packaging and superior quality. Kronan, launched in Sweden during the latter part of 2005, is a new product that sells at a slightly lower price. We relaunched one of our oldest brands, Röda lacket, as a portion-packed moist snuff. We launched a series of flavored cigars aimed at the Asian market under the Borkum Riff brand, well-known as a pipe tobacco brand name. In the US, we also extended our range of hand-rolled cigars with the El Rico Habano and Bolivar brands. In the chewing-tobacco segment, we launched an innovative new product, Red Man Silver Blend, that contains no sugar - a traditional ingredient in other chewing-tobacco products.
During the past two years, we have focused intensively on measures to increase productivity.
In Europe, we have implemented general personnel cutbacks and laid off more than 200 employees, while at the same time successively moving production of cigars and lighters to Asia. We created a more efficient management structure by downsizing Group management and reducing the number of divisions from four to three. We also implemented significant rationalization measures within match operations, including, for example, the closure of two plants in Europe - one in Spain and one in Turkey - and the sale of operations that lacked strategic importance. These measures produced results during the second half of the year, with significant improvements in the Group´s operating income and operating margin.
It is our policy to return to shareholders surplus funds that are not needed in operations. As the table behind me shows, a total of 7.5 billion SEK has been distributed during the past five years in the form of dividends amounting to 2.9 billion SEK and share buybacks amounting to 4.6 billion SEK.
During 2005, we acquired the shares outst
anding in premium-cigar company General Cigar for 155 MUSD. The company is among the market leaders in hand-rolled cigars in the US, with a market share above 30 percent. We are currently integrating General Cigar´s operations with Swedish Match North America - a process that will yield annual savings of 10 MUSD.
Swedish Match´s share price rose by 165 percent during the most recent five-year period. The Affärsvärlden General Index rose by 42 percent during the corresponding period. During the same period, earnings per share increased by 103 percent to 5.61 SEK, which is an average increase of 15 percent per year.
Today, Swedish Match has nearly 86,000 shareholders. Foreign ownership amounts to 80 percent of the share capital and is concentrated in the US and the UK. Among the major foreign institutional shareholders we find such companies as Wellington Management Company, Parvus Asset Management, Morgan Stanley and Cedar Rock Capital. Major Swedish shareholders include Handelsbanken Fonder and Robur.
Permit me to continue now with my comments on the Group and the different product areas.
Swedish Match has been a global company for many years. Our products are sold daily to millions of consumers throughout the world. Let me show a few examples:
We have a strong position in the US, with well-established brands such as Red Man and Macanudo. Matches are a major product in South America. The majority of our products are used in Europe. Cigars are highly appreciated on the Continent, while moist snuff is a favorite in the Nordic countries. Snuff, together with our other products, is also well-known in South Africa. If we continue in an easterly direction to Asia and Oceania, we also encounter products from our entire range. The Japanese purchase Firebreak chewing gum, while the Redheads brand of matches has become something of a national symbol in Australia.
We have focused on building a broad product portfolio, with strong and leading positions in many markets. Our international structure and distribution capacity enables us to utilize many marketing opportunities, and this will be a key competitive advantage in the future.
Sales during 2005 amounted to 13.3 billion SEK, which was a 2-percent increase compared with the preceding year. Operating income amounted to 2.6 billion SEK, which represents an improvement of 306 MSEK, or 13 percent, compared with 2004. Earnings per share amounted to 5.61 SEK, which has prompted the Board of Directors to propose raising the dividend by 0.20 SEK - or slightly more than 10 percent - to 2.10 SEK, giving a total distribution of 627 MSEK.
Now a few comments on individual product areas:
Swedish Match is the only company with significant operations in all the major markets for moist snuff. We are the market leader in the Nordic region and number two in South Africa. In the US, we are number three in a market that is currently showing strong growth.
In Sweden, moist snuff has undergone a unique class migration and its use is now accepted in all social classes. Since 1970, moist snuff volumes have more than doubled, and the product is now used by more than a million people in Sweden. Roughly half of these are former smokers, and women now form a substantial proportion of users - more than 200,000. During 2005, we sold 223 million cans in Scandinavia, which was a 1-percent increase compared with 2004. General, Ettan and Catch are the best-known brands in Scandinavia.
The US is the world´s largest market for moist snuff - nearly five times larger than the market in Scandinavia. The total market is growing and currently amounts to around 1 billion cans annually. At year-end, our share of the US market amounted to 10 percent.
Swedish Match has two strong brands in the US: Timber Wolf, which has existed in the market for ten years, and Longhorn, which was launched during 2003. Today, we are well positioned in the market, and our aim is to grow by at least 10 percent in volume during the current year.
Sales for the product area during the year totaled 3 billion 131 million SEK, which was a 2-percent increase. Operating income improved by 9 percent to 1 billion 504 million SEK.
Swedish Match is the worlds second largest cigar company. We have an extensive portfolio of brands that are sold in 70 countries. Two thirds of our sales are in North America, where our best-known brands are White Owl for machine-made cigars, and Macanudo, Cohiba, Partagas and La Gloria Cubana for hand-rolled cigars.
Sales in Europe are dominated by machine-made cigars, with la Paz one of the better-known brands. The new Salsa cigar brand was introduced last year. Here in Sweden, the classic Bellman is a well-known brand. A strong focus for operations in Europe during last year was to increase the number of new product launches and achieve substantial cost savings.
Cigars are produced in our plants in the US, the Dominican Republic, Honduras, Belgium and Indonesia. Sales of cigars increased by 4 percent to 3 billion 283 million SEK, and operating income rose 8 percent to 613 MSEK.
With our strong Red Man brand, we are among the leaders in the US market for chewing tobacco. We are also well positioned in the pipe tobacco segment. Borkum Riff is one of the worlds best-known brands, with which we have achieved export successes in Asia and elsewhere. Other strong brands are Boxer and Best Blend in South Africa.
Consumption of chewing tobacco and pipe tobacco is declining, but despite this trend, and thanks to our strong brands, the products continue to generate solid earnings and strong cash flows.
Sales of chewing tobacco rose by 2 percent during the year to 1 billion 79 million SEK. Operating income increased by 14 percent to 347 MSEK. Sales of pipe tobacco increased by 2 percent to 920 MSEK during the year, while operating income declined by 7 percent to 237 MSEK.
Our match brands are extremely strong and well established locally, two pertinent examples being Solstickan in Sweden and Redheads in Australia. In the lighters segment, Cricket is our best-known brand. As I noted earlier, match operations underwent extensive restructuring during the year, involving both plant closures and divestment of operations.
Sales for the match product area amounted to 1.3 billion SEK, while operating income was 13 MSEK an improvement of 25 MSEK compared with 2004. Restructuring costs of slightly more than 100 MSEK were charged against earnings in both 2004 and 2005. The restructuring of match operations is now complete, and we anticipate higher earnings and margins for the current year. Sales in the lighters product area amounted to 620 MSEK, while operating income increased to 44 MSEK.
Now I would like to say a few words about the future of Swedish Match.
The major portion of our earnings derives from sales in those markets where we have leading positions, that is, the Nordic countries and Continental Europe, the US, South Africa and Brazil, to name the most important. We work continuously to secure and strengthen our positions in these regions - by increasing the rate of new product launches for example.
During the first quarter of 2006, we began selling our Firebreak tobacco chewing gum in Sweden and Denmark after noting the positive sales trend in Japan during the past year. Firebreak offers cigarette smokers a smokeless alternative when, for whatever reasons, they cannot or do not wish to continue smoking.
We are continuously seeking new business opportunities. During the first quarter of this year, we acquired the European cigar brands Hajenius and Oud Kampen, which have substantial sales in the Netherlands, Belgium and Germany.
Since the preceding Annual General Meeting, we have repurchased shares to a value of 2.3 billion SEK, corresponding to 8 percent of the number of shares outstanding. Within the framework of our financial strategy, we plan to continue buying back shares for significant amounts during the coming years.
As I said initially, we continued with our efforts to reduce the cost mass within the Group during the year. We can now look back on two years of highly focused efforts to enhance productivity. As a result, we have entered 2006 with a more competitive organization, and this year we hope to harvest the fruits of these efforts, while also continuing, of course, with ongoing efficiency-enhancement measures.
And now if I may sum up:
You are shareholders in a unique company in the tobacco industry. Our strategy includes a continued focus on organic growth, centering on our snuff and cigar products, complementary acquisitions as opportunities arise, transfer of surplus funds to shareholders through prioritization of share buybacks and ongoing efficiency-enhancement measures.
Provided we continue to focus on and implement this strategy, I am FULLY convinced that we will continue to see a positive trend for Swedish Match in the long term.
Thank you for your attention.