AGM address 2001
Apr 24, 2001
Ladies and gentlemen, shareholders and other meeting participants,
You are stakeholders in a unique company.
Today, Swedish Match is a profitable and well-consolidated company with a number of well-positioned global brands. We are the only international company in the tobacco industry that has a strategy focused on niche tobacco products, meaning smokeless tobacco products as well as cigars and pipe tobacco. In contrast to many of our competitors, we are working with the consumer trends, rather than against them. We focus on taste experiences and enjoyment of high quality. We are among the world leaders - in first or second place - and have an extensive product range in those segments where demand is growing and solid potential exists for continued profitable growth.
During the past year, you, as shareholders, have harvested the fruits of the strategic decisions taken two years ago. The total return, including the share performance, dividend and redemption rights, amounted to 29%. The performance of the Swedish Match share during the last six months of the year was considerably stronger than the market average.
Trends and strategy
The background to these developments is the strategy renewal that took place in autumn 1998, when we faced the challenge of how best to deal with three overriding trends that have dominated the global tobacco market and will continue to do so for the foreseeable future:
- Firstly, consumption of cigarettes - by far the largest tobacco product - is declining in the most developed markets. The main reasons are concern about the health effects of smoking, the smoking bans in effect in many places and the increased taxation.
- Secondly, in response to this trend, snuff consumption is increasing in many markets - particularly in our large Nordic home market, but also in the other main market, the US.
- And thirdly, cigar consumption is undergoing a renaissance as a more socially acceptable and pleasure-oriented form of tobacco consumption.
These three consumer trends have resulted in an industry characterized by overcapacity, a need for restructuring and a global consolidation process that is steadily reducing the number of players.
After analyzing these trends, we decided to construct an operative strategic platform based on Swedish Match's many traditional strengths: world-leading expertise in niche tobacco products, a range of well-known brands with international strength and compass, favorable market positions in Europe and the US, and a sound financial position.
The strategic platform can be summarized as a global niche strategy for profitable growth. Our aim is to become a global specialist, with leading brands and good market shares in growing product segments, with the emphasis on smokeless tobacco, complemented by a focus on cigars.
The lighter and match operations are key assets that contribute in terms of distribution expertise and worldwide distribution networks.
To sum up, we have taken the following strategic steps during the past few years:
- As one of the first strategic measures, we sold our cigarette operations to Austria Tabak for a price of SEK 4,800 M. This gave us additional financial resources to participate in the restructuring of the industry and make acquisitions in line with our main strategic orientation.
- Through acquisitions, in above all the US, we became the world's second largest cigar company. By the same means, we also established a strong position in southern Africa - an interesting market that, among other notable features, has an established snuff tradition.
- We have worked intensively to integrate the acquisitions and develop synergies with the operations we already had.
- We have focused on organic growth through product development, launches of new products and in new markets, brand development and marketing campaigns.
- Restructuring of the lighter operations has produced earnings with satisfactory margins. In the match operations, a major restructuring program is under way that will take time, but significant steps have already been taken.
To these operative strategies I would also like to add the financial strategy, which is strongly linked to our overall objective of creating shareholder value and comprises active measures to optimize our balance sheet and ensure that we do not employ more capital than is necessary, but can actually return "surplus capital" to shareholders.
Now let us take a more detailed look at how the Company developed during last year, before examining the first quarter, strategic development and the future.
Last year, Swedish Match increased its sales by 22% to SEK 11.5 billion. Organic growth accounted for 6% of the growth and acquisitions for 16%.
We continued to achieve notable successes in the snuff area. In the US, sales volumes increased by 19% in a growing market. Market share strengthened from 6% to 8%. In northern Europe, sales accelerated to produce a volume increase of 8%, compared with the average of 5% per year during the past few years.
Growth for snuff was driven by the trend characterized by the increasing number of consumers who wish, for various reasons, to quit smoking and switch to snuff.
Our sales of chewing tobacco in the US increased somewhat during last year, despite a declining trend in the market. Our success in increasing our market share was due in part to the stronger sales organization resulting from the acquisition of General Cigar.
Sales in our other tobacco area, Cigars and Pipe Tobacco, increased by 87%, mostly as a result of acquisitions. As the world's second largest cigar company, we hold strong positions, particularly in the US and Europe. Growth during last year took place primarily in the machine-made cigar segment, where we have strong brands such as La Paz, Garcia y Vega, White Owl, Hofnar and Bellman. In the segment for exclusive, hand-rolled cigars, Macanudo, the world's largest premium cigar brand, has now joined our brand portfolio via General Cigar.
Sales of pipe tobacco, a segment in which we are one of the world's largest producers, increased by 81%, primarily due to the acquisitions of Leonard Dingler and Brasant in South Africa. Our position in the South African market was further strengthened by the acquisition of BAT's pipe tobacco operations, with annual sales of about 200 MSEK, in February this year. While the pipe tobacco market is declining globally, profitability is favorable.
The markets for both cigars and pipe tobacco are fragmented, and consolidation moves can be expected in both segments.
Our lighter and match operations are important for their strong contribution to our global dimension, with exceptional expertise and networks for marketing and sales directed at the retail trade and locally well-known brands on five continents.
During 1999, the lighter operations underwent a major restructuring process, as a result of which the production units were able to operate at close to full capacity and with reduced overall costs. Moreover, the market situation in Eastern Europe and Asia has shown signs of recovery.
Moving on to look at the earnings trend, we can report a strong increase in income before tax and items affecting comparability, which rose 30% to SEK 1.7 billion. All product areas except matches made a positive contribution to the increase.
In the Smokeless Tobacco Products product area, earnings for snuff increased by 15% last year and earnings for chewing tobacco by 11%. Operating margins are highly satisfactory - 46% for snuff and 27% for chewing tobacco.
We greatly strengthened the Cigars and Pipe Tobacco product area, mainly through acquisitions, which is the primary explanation for the increases in operating income - by 68% and 95% respectively - for these products. The operating margin for cigars rose to 13% and for pipe tobacco to 28%.
Lighter operations showed a highly positive trend, achieving an operating income of 74 MSEK. The Matches product area is currently being restructured, with the aim of achieving a 10% operating margin.
During 2000, we focused on three main tasks:
- creating continued growth through acquisitions and capitalizing on the synergies realized through integration of the acquisitions
- laying the foundations for increased organic growth by focusing on business and product development
- and optimizing the balance sheet structure by means of a large-scale redemption program and buybacks of the company's shares.
Acquisitions continued during last year. We now own 64% of the shares in General Cigar and have thereby claimed a leading position in the premium cigars segment in the US. We acquired a leading tobacco distributor in South Africa, Brasant, and we also acquired a number of minority shares in already partly owned companies.
Much effort was expended on optimizing the synergy effects from previous acquisitions in the cigar segment. We were able to coordinate our sales forces and improve their efficiency, which had a positive effect on costs for administration, marketing and sales, and on sales volumes. We achieved better market cultivation and coverage for our products in the large US market. We can now offer the retail trade an unmatched full range of niche tobacco products.
Our acquisitions have positioned us well in growing markets. During the year, we increased our investment in product development, product renewal and product launches, with the aim of speeding up organic growth. The primary markets in this regard are the US and northern Europe. Our long-term brand renewal program focusing on the Swedish snuff brands has achieved good results. The brands that have undergone renewal to date are Catch, General and Ettan, and more brands are in the pipeline.
The launch during the year of our quality label, Gothia Tek, should prove highly significant in the long term. Gothia Tek is the designation for origin-labeled Swedish snuff from Swedish Match, and thus also for our unparalleled 30 years of quality-focused research and development. The aim has been to eliminate harmful substances as far as possible throughout the entire chain, from tobacco cultivation, through production using unique pasteurization processes, and onward to the refrigerated counters in the stores - a total quality concept that covers every stage.
Swedish Match snuff is in the process of becoming a distinctive product category for all snuff users who want to know "what they are putting in their mouths." We are convinced that this could be a key competitive factor for future international expansion.
Sweden and Swedish Match are attracting increasing international attention for their proactive stance in promoting smokeless alternatives, particularly snuff, that have significantly lower health risks than cigarettes, as well as refined forms of pleasure such as cigars. Here in Sweden in particular, it is becoming increasingly clear that, when it comes to the use of tobacco, we are part of the solution rather than part of the problem. Our policy has always been that tobacco is an adult product that should not be used by anyone under the age of 18.
In both the snuff and cigar areas, important preparations were made during the year for product launches and marketing campaigns - to which I will return shortly.
The third main task during the year was to complete our strategy for optimal use of capital, based on redemptions and buybacks of shares, and a healthy dividend. As you will recall, last year's annual general meeting approved a mandate for the repurchase of a maximum of 5% of the total shares outstanding. This proportion was subsequently increased to 10% by an extraordinary general meeting, at which it was also decided to cancel approximately 17.3 million of the repurchased shares. These measures, combined with a redemption program worth nearly 1 billion SEK and a dividend of nearly 540 MSEKI, meant that we returned some 2.4 billion SEK to shareholders during last year. In relative terms, this is one of the most far-reaching programs of its kind in Sweden and is, together with our operating strategies, one of the main reasons for the performance of our key ratios.
This brings us to the new year and the first quarter.
2001 began well for the Group. Sales increased by 28%, supported by a strong dollar that boosted sales figures by four percentage points. The acquired operations accounted for 15 percentage points of the increase, and all product areas reported higher sales figures. It was gratifying to note that organic growth was as high as 9%.
Operating income was up 18%, thanks primarily to the contributions from cigars, pipe tobacco, lighters and matches. Cigars showed a 94% increase in operating income - an excellent performance on a par with the 85% increase in sales. The major acquisitions in the US naturally come through in the figures, but markets showed overall growth in both North America and Europe.
Pipe tobacco sales also increase substantially when we consolidated the acquisition of BAT's pipe tobacco operations in South Africa during two of the period's three months. Sales increased by 18% and operating income by 20% during the quarter.
Matches produced a positive surprise. After several years of concern about profitability, the area showed a strong 76% increase in earnings on the back of a 9% increase in sales. For the past year, matches have been undergoing a restructuring program aimed at restoring the profit margin to at least 10%, and this level was reached during the quarter. We effected positive price changes in some markets, producing high margins that had a strong impact. This is not intended to detract from the message that an upturn is imminent in this area, but much work still remains to be done before we will be satisfied.
Restructuring of the Lighters division is now complete. Lighters had an operating margin of 11.5% during the quarter, and operating income rose strongly by 56%. Sales were up 26% and demand is increasing in some of our most important markets.
Snuff also showed solid growth, with an increase of 15%. The volume increase in the US continued at a high level, rising by 8%, while the volume increase in the Nordic region fell off to 4%.
Snuff takes pride of place in our major focus on product development, product launches and market capture, which will result in increased costs being expensed against earnings during the year. As a consequence, the increase in operating income for snuff was limited to 2%. However, we are talking here about interesting investments, with considerable sales and profitability potential in the longer term.
All in all, our operative measures during the first quarter and our program to optimize the company's capital structure yielded a healthy increase in earnings per share for shareholders - up 36%.
If we now turn our gaze to the future and the rest of this year, the strategies are already in place. We will continue to focus on developing synergies following our major acquisitions, as well as seeking suitable operations to acquire, pursuing the restructuring program in the match operations and focusing on increased organic growth - notably via an exciting program of product launches in various markets worldwide. We are continuing with the implementation of our financial strategies, pursuing our share buyback program so as to continuously optimize the use of capital for the best interests of shareholders.
Allow me to give some indications about what lies in store.
As you know, we have scored substantial successes with snuff in the US, where, within only a few years, we have built up a market share that today stands at 8%. This success is attributable to the Timber Wolf brand, improved market coverage and a stronger sales force.
Next month we will be venturing into the premium segment with the Seqoia brand, aimed at the US market. At the same time, we intend to continue with our efforts to cultivate the US snuff market on a broader front.
I am also pleased to be able to report today that we have begun our launch of portion-packaged snuff in India. We are starting with a limited campaign in Bombay, a city of some 15 million inhabitants in a country with a population of 1 billion. It is a totally new product for this market, aimed primarily at the same consumer group that is giving up cigarettes in favor of snuff in Sweden - that is to say a modern and aware middle-class group. Progress will undoubtedly take some time, but Swedish Match has a long-term approach.
I can also report that we are engaged in a small-scale experiment aimed at creating a snuff market in Moscow. Test sales have been initiated in 60 stores in the Russian capital. However, I must emphasize that caution is the watchword - we are talking about test sales at this stage.
Here in Sweden, we are continuing to differentiate and refine the range of snuff products, with a special focus on people who are highly motivated to give up cigarette smoking. We are strengthening our competitiveness by building a new production plant.
In the cigar area, the premium American brands are opening up many expansion opportunities for us in other parts of the world. Macanudo, the biggest-selling premium cigar in the US and the world, will be the focus of a strengthened marketing campaign in Europe. Several of the high-quality brands in the General Cigar portfolio have a potential that has not yet been exploited outside the US.
These were a few examples of the product development program we shall now continue to pursue.
For a number of years, Swedish Match has displayed a high degree of stability as successive business cycles give way to each other. It is simply the case that economic trends have a minimal effect on demand for our products, which is yet another source of strength for the Swedish Match share.
Against this background, we take a positive view of the development potential for the company during the current year.
It is now essentially clear that the misleading cancer warning on snuff cans that was mandated by the EU, will now disappear. We are convinced that this is a first step toward the lifting of the ban on snuff within the EU. In Sweden, snuff has contributed to a reduction in smoking, which has been welcomed by most people. It is simply unreasonable to deny this same opportunity to cigarette smokers in other European countries, and we are continuing with our efforts to widen understanding of this situation.
In closing, I would like to express my thanks to our shareholders for the interest and confidence they have shown in us. We will do our utmost to justify this confidence during the period from now until we meet again in a year's time.
Thank you.