I am proud of the hard work and commitment from all of our employees to work together to embrace change and promote a culture of openness and trust, making such changes not only possible but successful.
The year that was
Swedish Match entered 2009 with a clear vision: as the global smokefree leader, we would work to drive change and continued growth in a new and changing competitive landscape. As best in class in cigars, we would be more focused, working toward improving our profitability. We would maintain operational excellence in lights. In all our businesses, we would work to be a more focused and more valued supplier, delivering outstanding products, service, and quality for money, with brands that stand the test of time. We would engage in new ideas and work together in a spirit of openness and a determination to excel.
With a clear vision and roadmap for change, Swedish Match during 2009 went through an extensive transformation process, while at the same time delivering excellent financial results. During the year, total company sales grew in both local currency terms and in Swedish kronor. In local currency terms, all product areas except for lights exhibited sales growth. The snus and snuff product areas led the way with impressive growth, with sales exceeding 4 billion SEK for the first time. Operating profit growth was also strong, growing at double digits in both local currency and reported Swedish kronor. Basic earnings per share reached 12.88 SEK including discontinued operations, and 9.67 SEK from continued operations, which was up 43 percent and 17 percent respectively from the previous year. Each measure was the highest level ever. For 2009, the proposed dividend will increase by 16 percent, to 4.75 SEK per share. The Company bought back 18.4 million shares as part of its ongoing share repurchase program. The Swedish Match share price rose by 40 percent during the course of the year, reaching 156.90 SEK by year-end.
Success in the face of change
With the challenges of a slowdown in the worldwide economy, continued financial turmoil, and a constantly changing regulatory environment, Swedish Match entered the year with the will and determination to respond to these challenges, while maintaining focus and vision.
While in every country and in every market the competitive and regulatory environment is continually changing, it was apparent early in the year that there would be particularly significant changes in the US market. A new federal tobacco excise tax, effective April 1st, altered both absolute and relative prices among tobacco products. The largest moist snuff competitor would alter its pricing and promotional strategy, further changing relative prices in that market. The US Food and Drug Administration would be taking over tobacco regulation. With such dramatic changes, a company must be able and willing to adapt, and seek ways to use change as a way of gaining a competitive advantage. While potentially disruptive, the US organization succeeded not only in “weathering the storm”, but also improved sales and profitability in both the snuff and the cigar businesses, while successfully integrating the production of chewing tobacco of the third largest competitor into our own facilities.
In Scandinavia, the Swedish market for snus regained its growth trajectory, after two years of volume declines. Market declines in Sweden in both 2007 and 2008 were brought on by dramatic retail price increases, stemming from tax increases of more than 170 percent during those years. In 2009, with a more benign pricing environment, and with the successful introduction of a number of new products, the Swedish market grew by approximately five percent in volume terms according to Nielsen estimates. At the same time, reduced travel due to the recession caused the Travel Retail market to slow to a more moderate growth rate after rapid growth in the previous two years. For Swedish Match, successful new product launches, packaging and product redesigns as well as upgrades and a strong commitment to category management, allowed for solid improvements in sales, shipment volumes, and operating profit.
In Europe, lag effects from smoking bans were still present in some markets, most notably in the Netherlands, while the European machine-made cigar market overall was demonstrating a level of stability not experienced in many other consumer product areas. We identified possibilities to improve cigar profitability in Europe, but knew that it would require action and determination to make necessary changes. Steps were taken to address profitability through product assortment rationalizations, supply chain management, production efficiency programs, as well as product innovations and new products. Despite the costs incurred and potentially disruptive effects of making these changes, sales and profitability in Europe were unchanged from the previous year.
Reshaping Swedish Match
Along with local changes in product assortment, improved sales force effectiveness, category management, and responses to local regulatory changes, Swedish Match made a number of structural changes that will better prepare us for the challenges and opportunities that lie ahead.
Having clearly established a vision of being the global smokefree leader, best in class in cigars, and maintaining operational excellence in lights and pipe tobacco, organizational changes were put into place which would facilitate achieving this vision. The Company is now operationally organized into two sales divisions for our most important markets, the US and Scandinavia. A third division, the Smokefree Division, has the responsibility to develop and produce snus and moist snuff, as well as to manage and nurture Swedish Match snus and snuff strategic portfolio brand worldwide, bringing both efficiencies and clearer and better coordination of brands and products in this growth area. The Smokefree Division also has global responsibilities for scientific affairs.
Swedish Match International makes up the fourth division, with production and supply chain responsibility for cigars, as well as sales responsibility for cigars in Europe and the US premium cigar market, and overall responsibility for managing the lights and pipe tobacco businesses. As outlined in greater detail further below, if the proposed creation of a new company with Scandinavian Tobacco Group (STG) is achieved, much of what is now Swedish Match International will become part of this new company. The fifth division, Other Operations, is primarily responsible for serving the distribution needs of Swedish Match and other tobacco and non-tobacco companies on the Swedish market. In addition to its current tobacco and non tobacco offerings, Swedish Match division Other Operations is an efficient and effective vehicle for distributing over the counter pharmaceutical products, a possibility since the dissolution of the Swedish pharmacy monopoly.
A new company, SMPM International (SMPMI), was established and became operational during the late spring of 2009. This joint venture company brings together Swedish Match with Philip Morris International (PMI) with an ambition to bring smokefree products and snus to markets outside of Scandinavia and the US. During the year, SMPMI has been actively working, combining the knowledge and expertise of its own organization with input and expertise from its joint venture partners. During 2010, SMPMI plans include conducting a first test launch in Asia. Supplied and supported by the Swedish Match Smokefree Division, SMPMI will deliver products through PMI’s significant and world class selling organization.
Swedish Match continuously reviews and assesses its business portfolio to ensure both clear direction and to enhance shareholder value. In September, the South African pipe tobacco business was sold to PMI. It was determined that this strong and profitable business could have better potential in the hands of a global cigarette manufacturer. As South Africa accounted for most of the pipe tobacco business, the remaining pipe tobacco business is no longer reported separately. Proceeds from the sale of this business were used to further fund the Swedish Match share repurchase program.
With a new organizational structure and a greater emphasis on smokefree products, Swedish Match ended the year as a different company from where it began, better able to meet the opportunities that the future will bring.
After the close of the year, in January 2010, it was announced that a letter of intent was signed with STG to form a new cigar, pipe tobacco, and fine cut tobacco company. This new company is intended to combine the current STG cigar, pipe tobacco and fine cut tobacco businesses with the Swedish Match premium cigar, European cigar, and pipe tobacco businesses. Not only would such a company provide new opportunities for growth and profitability improvements, but it would also become a leader in machine made cigars in Europe. Assuming the transaction is completed and the new company is formed, (subject to due diligence by both parties, final transaction agreements, and regulatory approvals) Swedish Match will be primarily a smokefree company, with strong and profitable businesses in US machine-made cigars, and lights, as well as the primary distributor of tobacco in Sweden.
Swedish Match of tomorrow
I am proud of the hard work and commitment from all of our employees to work together to embrace change and promote a culture of openness and trust, making such changes not only possible but successful. I am especially proud that we were able to achieve transformational change while never neglecting to serve our customers’ and consumers’ needs. The solid increases in sales and operating profit, the excellent shipment volumes, the successful new product launches – all while transforming the company, are a testament to the hard work and dedication of a world class organization.
Swedish Match will leverage its leadership in snus and strong position in US moist snuff – its knowledge of the product, consumer understanding, its leading technologies, as well as its strong brand portfolio – to further develop its smokefree businesses in Scandinavia and the US, and, through its partnership with PMI, work toward establishing smokefree markets in other parts of the world.
Swedish Match will continue its drive to be best in class in cigars, working to improve its profits through strong category management, cost containment, and consumer focused brand and marketing programs. During 2010, we expect that Swedish Match will become the owner of a 49 percent stake in a company that is the market leader for US premium cigars and for European machine-made cigars, the number two cigar company worldwide, as well as the world’s leading pipe tobacco company. Swedish Match will maintain operational excellence in lights, delivering high quality matches, lighters, and fire related products to consumers across the globe.
At the upcoming Annual General Meeting of shareholders, the Board of Directors will propose both an increased dividend, to 4.75 SEK per share, and a continuation of the Swedish Match share repurchase program.
As we transform Swedish Match, we are better able to face the challenges and opportunities of the future. I am convinced that our continued hard work in following through with our strategy will deliver value to our customers, our consumers, and to you, our shareholders.
Stockholm, March, 2010
Lars Dahlgren
President and CEO
Source: Swedish Match Annual report 2009