Dear shareholders and honored guests
The fiscal year 2006 was a strong one for Swedish Match. We reported the best-ever earnings and retained our position as one of the world's leading companies in niche tobacco products. Profitability improved, sales increased and positions were strengthened in the core areas of snuff and cigars. It was also a positive year for shareholders with a 37-percent increase in the share price. You are owners of a highly profitable company, and I am pleased to announce that we are able to increase the dividend according to the Board of Directors' proposal to SEK 2.50 per share, an increase of 19 percent.
Swedish Match conducts its business in a dynamic environment. In our industry, changes are occurring constantly to which we must adapt. New trends in society influence people's product preferences and their attitudes towards tobacco are changing.
Legislation on tobacco has been tightened significantly in recent years. Bans on smoking in public environments have been introduced in more and more countries, and marketing restrictions are constantly increasing. At the same time as these limitations reduce options for selling and using tobacco, they create new marketing opportunities for us. Swedish Match's smokeless tobacco products offer a better alternative for people who wish to stop smoking. The transition from smoking to snus in Scandinavia is clear, and it is also partially discernable in the US, where there are currently some 50 million smokers or 20 percent of the adult population. This can be compared with Sweden, where slightly less than 15 percent are smokers, which is the lowest figure in Europe.
As a global tobacco player, we respect the requirements and expectations that society places on us with respect to the environment, social responsibility and human rights. In this manner, we also nurture the trust that consumers place in us when they buy our products. This is confidence that our customers have in us as a good partner and that you as shareholders have in the company and its business as a good investment.
As an exchange-listed company, stringent requirement are placed on our corporate governance. This is an area in which Swedish Match sets a high standard. In addition to the requirements placed on us by the Swedish Code of Corporate Governance, there are requirements on corporate governance in Swedish Match from our previous US market listing. Based on these requirements, we have created well-defined routines and systems for management and control and transparent reporting to shareholders and the market.
Today, Swedish Match has about 60,000 shareholders, of which foreign ownership accounts for slightly more than 80 percent. Our larger owners include Wellington Management Company, Parvus Asset Management, Morgan Stanley and Cedar Rock Capital. Most of these owners have been with the company for some time. Among Swedish owners we find Robur, SEB and Handelsbanken Funds.
Since its exchange listing, Swedish Match, along with such companies as Nokia, has had the best price trend among the larger listed companies in Stockholm. The share price has increased sixfold.
In pace with increased interest for the Scandanavian snus market, the rate of product launches has been stepped up. The new market situation places demands on Swedish Match as the market leader to always remain at the forefront. Over the past year, we launched more new products than ever before. Onico and Kronan are two examples. They both belong to segments in which Swedish Match was not previously represented but where we took a leading position during the year.
In the same way that we work hard in Scandinavia to defend our position, we are working hard in North America to increase market share through extensive work with product development and measures to promote product categories. This work included launching Wolf Packs, portion moist snuff under the Timber Wolf brand, and Game, a machine-rolled cigar under the Garcia y Vega brand.
In Europe, a number of new launches in the cigar and cigarillo categories took place, and systematic work was conducted to increase market shares. During the past year, we acquired the Hajennius and Oud Kampen cigar brands, two well-respected brands sold primarily in the Netherlands, Belgium and Germany.
In recent years, we implemented significant rationalization measures in both Swedish and European operations that included divestment of unprofitable units that achieved full effect in 2006.
We are working actively with the balance sheet in order to achieve an optimal capital structure. As part of this effort, shares were repurchased during the preceding year for a total of SEK 3,674 M. During the current year, we will achieve our long-term goals with respect to the balance sheet's structure. Swedish Match's business is characterized by high and stable cash flows, and considering today's low interest rates, our share buy-back strategy has been profitable for you as shareholders.
Significant amounts have been returned over the past five years through dividends and share repurchases. In total, nearly SEK 10 billion was paid to shareholders.
The past year was a successful one for Swedish Match. We delivered the best results ever.
Sales amounted to SEK 12,911 M. Excluding divested operations, sales increased by three percent. Operating profit amounted to SEK 3,236 M, which was an increase of 15 percent.
The operating margin was also strengthened considerably and amounted to a full 23.9 percent for the year, which was 4.2 percentage points better than the preceding year.
Earnings per share amounted to SEK 8.12, which as a 45-percent improvement.
Snus continues to grow, and with an increased number of players in the Swedish market, snus is increasingly in focus. Our ambition is to always stay one step ahead of the competition, which we succeeded in doing since Swedish Match during the second half of the year retained its market share in Sweden of about 90 percent as measured in volume. Today, there are slightly more than 1.1 million Swedish snus users, and the market amounts to about 220 million cans.
These figures can be compared with the US, which is the largest market for moist snuff, amounting to about one billion cans. Swedish Match is number three in that market with a volume share of about 10 percent and has two strong brands in Timber Wolf and Longhorn.
Swedish Match strengthened its positions and increased sales in both Scandinavia and the US. Last year was a strong year for snuff. The Swedish market grew by an estimated 3 percent, while the US market grew by more than 10 percent. A number of new products were launched during the year, including Ettan White, General Mini White and Göteborgs Rapé Lingon. In Norway, Nick & Johnny was launched.
Sales amounted to SEK 3,363 M, an increase of 7 percent, while operating profit amounted to SEK 1,604 M, also an increase of 7 percent. The operating margin amounted to 47.7 percent.
During the year, Swedish Match strengthened its position as the world's second largest cigar company in terms of sales value. We now sell cigars in more than 70 countries. Some of the Group's most well-known brands are Macanudo, La Paz, Willem II, Hoyo de Monterrey and Cohiba.
The total world market amounts to about 15 billion cigars per year, with North America and Western Europe accounting for fully 90 percent of sales. We have a strong position in the US premium cigar market where five of the ten most sold premium cigar brands in the US are owned by Swedish Match.
Sales for the year amounted to SEK 3,407 M, which was an increase of 4 percent. Profit was SEK 747 M, which was a full 22 percent higher than 2005 and resulted in a strengthening of the operating margin to 21.9 percent.
Swedish Match is a leading player in chewing and pipe tobacco. In the North American market, we are number one in chewing tobacco with a market share of 44 percent. Our strongest brands in chewing and pipe tobacco are Red Man and Borkum Riff. Both of these categories are diminishing, but thanks to strong brands, we have been able to compensate much of the volume decline. Both product areas generate favorable profits and cash flows and are an important part of the business.
Sales of chewing tobacco declined 2 percent to SEK 1,063 M, while operating profit declined six percent to SEK 326 M. Sales and operating profit were negatively affected by a weaker USD.
Sales of pipe tobacco declined by 2 percent to SEK 899 M. Operating profit increased by 10 percent to SEK 261 M.
Swedish Match manufactures and distributes lighters and matches in a number of countries with several major and well-know brands. Solstickan is the most well-known brand in Sweden, but Swedish Match also has strong brands outside Sweden, such as Red Heads in Australia. Our disposable lighter Cricket is a strong brand in many markets.
The global market for lighters and matches is relatively stable, with a declining trend in industrialized countries.
Match products had sales of SEK 1,503 M in 2006, a decline of 22 percent, compared with the preceding year. The decline was attributable to divested operations, Operating profit amounted to SEK 247 M, an improvement of nearly SEK 200 M over the preceding year.
After working for a number of years to consolidate operations, we will now continue to focus on organic growth and taking a more aggressive role with respect to acquisitions. The ambition now is to find a number of complementary and profitable acquisitions in the cigar product are and to invest more in snuff operations, particularly in our main markets in the US and Scandinavia. We will also invest further in product development and activities to promote growth. The organization is being strengthened in marketing and sales in a number of countries.
We continue the established financial strategy to create maximum value for you as shareholders. The share repurchasing program will continued and in future result in a dividend of between 30 and 50 percent of net profit.
You are the owners of a unique and profitable company that since its listing on the Stockholm Stock Exchange eleven years ago has generated very favorable returns.
We are now at a point where we are receiving increasing attention relating to snuff and its relative advantages, compared with cigarettes. We have a gigantic US market to further penetrate with moist snuff, and we will continue to expand cigar operations to become more effective and productive in what we do.
Thank you for your attention.