CEO comment
A strong business platform that delivered solid earnings
As the year progressed it became clear that our moist snuff strategies in the US and snus strategies in Sweden were working and delivering solid results.
2008 has been an eventful year, and for the shareholders of Swedish Match a further testament to the solid business model on which the Company is based.
It is also a year when we have seen our investments in growth paying off. Total company sales grew for the first time since 2005, even with continued negative currency effects. The Company’s net profit grew and reached the second highest level in this decade. Earnings per share reached 8.98 SEK per share, a level unsurpassed since the sale of the cigarette division in 1999. As important as demonstrated solid performance is the business platform itself. Swedish Match has over the years continually worked to become more relevant, and be even more strongly positioned in the marketplace, in order to fully take advantage of the business opportunities that lie ahead.
The year that was
The year 2008 was marked by a credit squeeze and a global recession. At the beginning of 2008 the recession in the US had only just begun. The central bankers in most major markets were more worried about inflation than a slowdown in the overall economy. We at Swedish Match were determined to grow our volumes and improve our market position for moist snuff in the US, while improving our profit level in Scandinavia despite another substantial excise tax increase on snus in Sweden for the second year in a row. As the year progressed it became clear that our moist snuff strategies in the US and snus strategies in Sweden were working, and delivering solid results.
At the beginning of the year we recognized that there would also be challenges for our cigar businesses – from the public smoking bans in France and the Netherlands, to the product mix shifts occurring for machine made cigars in the US, to trade inventory reductions for premium US cigars. Swedish Match and its employees stood up to the challenges before them, bringing new and innovative products to the marketplace which met consumer and customer needs for quality, value, and freshness. For instance, in the US machine made cigar business we introduced an all-new FoilFresh® packaging, ensuring longer lasting freshness, and addressing both a consumer and a customer need. In Europe, we extended our range within our most popular brands, such as La Paz, to include cigars that are better adapted to shorter smoking occasions, in view of public smoking bans. In the US premium cigar market, we continued refreshing our assortment with new varieties, recognizing the need for package size, cigar type, and brands to deliver both excellent quality and unsurpassed value.
In the financial market environment in 2008, it became increasingly evident that taking on new debt would be more expensive if and when it became available. This, of course, affected Swedish Match, but it also affected the thousands of businesses especially in the US and Europe which must rely on credit to fund their inventories and continuing operations. From a Swedish Match perspective, this meant that there would be a pause in the Company’s share repurchase program in order to maintain a high degree of flexibility in an environment of extreme uncertainty. It also meant that the Company needed to work even more closely with both suppliers and vendors to ensure efficient movement of materials and inventory, and helping retailers, especially for premium cigars, to manage their businesses for better cash generation. Consumers and retailers are the lifeblood of Swedish Match, and the Company worked to ensure that the changing needs of these parties were being addressed.
Our position in an ever-changing legal and regulatory environment
Communication and influence regarding sound regulations as the base for access to markets and the right to compete with other tobacco products cannot succeed without a visible and engaged Swedish Match, with a clear voice in matters that concern us. Swedish Match continues to engage in regulatory affairs in all our major markets, and 2008 was no exception.
Swedish Snus has been debated during 2008, being expressed both in the scientific community and among politicians. The European Commission published the scientific report Health Effects of Smokeless Tobacco Products (SCENIHR) that among other things stated that Swedish Snus poses significantly fewer and less severe health risks than cigarettes and that other currently legal tobacco products within the EU are more hazardous in comparison. The ban in the European Union on Swedish Snus exports to other member states has publically been challenged by the Swedish Minister for Trade who views the ban discriminatory and disproportionate.
Swedish Match is currently growing in an environment framed by regulatory activism targeting tobacco products. Given the current developments, smokefree products and especially Swedish Snus have great potential, but also run the risk of being viewed as one of many tobacco products within the same regulatory framework. The challenge for Swedish Match is to ensure sound competition and that Swedish Snus is regulated based on scientifically balanced facts with regard to its unique origin, quality and potential as a viable smokefree alternative.
Snus and snuff: maintaining our lead in Scandinavia, growing in the US
Snus and moist snuff is by far the most important product category for Swedish Match in terms of delivering operating profit. We estimate that the combined US and Scandinavian markets for snus and moist snuff amount to approximately 1.4 billion cans annually, with a consumer retail value of 35 billion SEK or more. Swedish Match is the market leader in Sweden and Norway, and has a solid position in the value segment in the US moist snuff market, continuing to grow market share in volume terms. During 2008 the Company’s sales for snus and moist snuff grew by 16 percent, while operating profit increased by 24 percent. Profitability in the US improved over the course of the year, as Red Man moist snuff, launched in September 2007, delivered improved results following its national rollout in the spring of 2008. Profitability also improved as price effects in Scandinavia offset volume declines from sharply higher consumer prices in both 2007 and 2008 stemming from increases in Swedish excise taxes. By the end of 2008, Swedish Match had achieved substantial progress in the continuing strategy to strengthen its position in the snus and snuff product categories, and laying the groundwork for further growth.
In the US, Red Man moist snuff was a clear success, having grown the fastest of any Swedish Match new product launch in the US, and approaching 2 percent share of market at the end of the year – after only 15 months since the first launch. Red Man now joins Timber Wolf and Longhorn in the snuff portfolio, and together these brands offer a strong and competitive brand portfolio that took Swedish Match volumes to an all time high. Our US moist snuff market share reached another milestone in 2008, surpassing 12 percent for the full year.
In Scandinavia, our sales and marketing teams have worked even harder at delivering products and programs that customers and consumers need. They worked to provide better service, better products, excellent value, and a commitment to partnership and growth. On the product front, a number of exciting new product launches were made, often employing the Company’s patented “white portion technology” and presented in our exclusive star formation. This technology and product presentation provides clear consumer benefits as well as helping to differentiate Swedish Match produced products from those of our competitors. The results of the efforts of our sales and product teams have been clear. A proof is that, despite an ever increasing competition, we can look back at a year with stable and very strong market share in the important premium segment where we ended the year with nearly 97 percent of the market according to ACNielsen. Despite higher prices, brought on by the sharp increases in excise taxes, consumers have demonstrated their loyalty and recognition of the value of their brands and products, and for Swedish Match this means that we have been able to further grow our Scandinavian snuff business, both in terms of sales and profitability.
Our vision and strategic direction
As a company we have many stakeholders, including our shareholders, employees, consumers, and customers, as well as governmental and non-governmental organizations and society as a whole. As the CEO, my prime objective is value creation for our shareholders. I sincerely believe that to achieve this we need to address the needs and demands of all our stakeholders. By doing that – and never losing sight of the needs of the consumers, we can drive value. Operationally, value creation for me is about managing what we have today in the most efficient way and, most importantly, generating organic growth for the future.
Of our existing businesses, the organic growth prospects are best in our smokefree portfolio. This is also where we have many of our core competencies. We have a unique heritage, strong brands, and a talented organization. We know the consumer and we have a technological lead. Social and regulatory trends support the growth of smokefree products, and in particular more modern forms like Swedish Snus.
This is the basis for our vision and strategic direction:
- We should build on our strengths and position the Company as the smokefree leader, not only in Scandinavia, but on a global scale.
- We should develop our cigar business to the best in class; with focus on consumers and customers we should improve profitability.
- Our lights and pipe tobacco businesses should continue to focus on operational excellence and profitability.
Global smokefree leader
For me it is the consumers who decide who the leader is. To efficiently offer our brands to our consumers we rely on our partners in the trade and an open and honest relationship with regulatory bodies and opinion makers.
- Therefore our brands should be the preferred choice by consumers. Our brands should be the icons of the category and deliver outstanding emotional and functional consumer satisfaction.
- We should be the most valued partner to the trade wherever we do business. We should come with the most valuable offerings, provide the best insights and be the preferred and most trusted partner in managing the smokefree category.
- We should remain the industry authority for regulators and opinion makers.
Swedish Match will always remain open to dialog with authorities and law makers, but never fail to express a dissenting opinion if the foundation for our business is being questioned. We will reinforce our position in the Industry by actively offering decision makers our knowledge about every aspect of snus and providing our consumers fair and balanced information regarding known health effects.
As a global leader in smokefree tobacco, we can drive change and continue growth in a new and changing competitive landscape.
I am working closely with my senior management team to help ensure that the entire Company is committed to unlocking the value potential of smokefree products, wherever that may be. Swedish Match is currently increasing its production capacity for snus with its state of the art facility in Kungälv in Sweden. We are test marketing snus with our joint venture with Lorillard in the US, and also with our own Swedish brands in selected tobacconists in a number of US cities. Following the close of the year, we took an important step to expand our sights on markets across the globe for smokefree tobacco and we announced our joint venture for smokefree products with Philip Morris International. With this joint venture, and with other activities and programs, we will work to improve our ability to leverage our strengths on a truly global scale. Product development efforts will be stepped up, always with the consumer foremost in our activities. Competition is also recognizing the high potential in smokefree products. In the industry, we witness how both the scientific community and more and more consumers are recognizing that smokefree tobacco, and Swedish Snus in particular, is significantly less harmful than smoking, and can play a role in tobacco harm reduction.
Large tobacco companies, traditionally focused on cigarettes, are entering the fold. In the past year, Altria announced that they would become the largest US moist snuff company through the acquisition of UST. Reynolds American, through its previous acquisition of Conwood, continues to drive growth in the US snuff category. Reynolds and others are also testing new smokefree products in the US. British American Tobacco has acquired the snus business of Scandinavian Tobacco Group and is now the largest competitor in Sweden. Imperial is the largest competitor in Norway.
This brings new challenges, but also opportunities – for the growth and development of smokefree category in markets throughout the world. With our strong position, intensified work to become even better in all areas, we stand well prepared to benefit from this development.
Best in class for cigars
During 2008 we faced some challenges in our cigar business. At the same time we have a solid foundation. We have strong market positions in many countries and recent acquisitions like Cigars International in the US and Bogaert Cigars in Europe have added key competencies and brands.
As best in class, Swedish Match will become more focused and a more valued supplier, delivering outstanding product, service, and quality for the money, with brands that stand the test of time.
Our cigar business has three legs: premium cigars, US machine-made cigars, and European machine-made cigars. While the brands, product types, and geographies may be different, many similarities in sourcing, systems, and production, to name a few, provide us with opportunities to improve, helping us to achieve a best in class position, and helping us to improve shareholder value over the coming years. One of the changes we have already implemented at the end of this past year has been to further integrate the cigar units. Our Swedish Match International business unit, for example, now has full responsibility for both our European cigars, and our US premium cigar businesses.
Lights and pipe tobacco – operational excellence
In lights and pipe tobacco, we have strong supply chains and brands. Historic rationalization initiatives and focus on continuous improvement means that we can now look at state of the art production setups. Our factories are well utilized and automation is high. During the year we inaugurated a new and modern lighter manufacturing facility outside Manila in the Philippines.
We have a brand portfolio that is uniquely strong. Our match brands are icons in many countries, Cricket is getting more and more recognized as one of the best quality disposable lighters and for pipe we have international momentum with leading brands like Borkum Riff and in South Africa our core brands Boxer and Best Blend account for more than 90 percent of the market.
All of this has contributed to the excellent results for these businesses, despite the pressure on volumes caused by a general fall in demand. For the future we will continue to focus on excellence. We will manage our brands, we will develop and offer even more relevant products to our consumers, and we will stay focused on productivity.
A strong product portfolio, driving profitability and growth
Every product area, from our smokefree tobacco products, to cigars and pipe tobacco, to lights has an important role to play in the Company’s portfolio.
We will continue to leverage our strengths in category management, sales and logistics synergies, and brand and product leadership to drive further growth. We will further increase our focus on growth opportunities for smokefree. We will leverage our heritage, our skills and competencies and technological lead across geographical boundaries. We will develop and leverage our brands. An example is the Red Man snuff product launch that has been the beneficiary of the exceptionally strong brand values nurtured over the years for the Red Man chewing tobacco business.
Organic growth stems from a collaborative effort
Of all the elements of driving organic growth, perhaps none is more important than the collaborative efforts of the Swedish Match team. Based on a clear vision, well communicated and defined strategic objectives, and an environment based on teamwork and trust, the employees of Swedish Match are working together in a spirit of openness and a determination to excel. My management team and I will continue to openly engage new ideas, and invite better ways to achieve our goals. Growth comes not only from products, marketing, selling and efficient use of resources. It comes from talent and a culture of success.
Stockholm, March 2009
Lars Dahlgren
President and CEO
Source: Swedish Match Annual report 2008