CEO comment
Another successful year has passed for Swedish Match and there are many events to report. We completed two significant cigar acquisitions and noted sharply increased sales of our American snuff. Despite significant increases in the tax on snus, our earnings in Scandinavia rose above the preceding year’s level during the second half of the year, which resulted in a gradual improvement in the Group's operating margin. Our strong market positions and healthy cash flow provide us with excellent opportunities for generating a continued favorable return to our shareholders. Our shareholders can be gratified by a 20.7-percent increase in the share price during 2007.
Consolidation of the tobacco industry
Sven Hindrikes
President and CEO
The tobacco industry is characterized by high profitability and healthy cash flows, but also by weak sales development and declining volumes in a number of product segments, particularly in industrialized countries.
For a number of years, the tobacco industry has been consolidating and during 2007 two major deals were reported. UK-based Imperial Tobacco acquired the Spanish-French tobacco company Altadis and Japan Tobacco acquired the UK tobacco company Gallaher. Following this consolidation, only a few listed tobacco companies remain. The main reason for the consolidation trend is the declining consumption of cigarettes in the Western World, which is generating a need to merge in order to achieve economies of scale.
The greatest threats to the tobacco industry involve political intervention in the form of regulations, bans and tax increases. The introduction of bans on smoking in a number of European countries during the year had a negative impact on cigar sales.
In Sweden, sales of snus were adversely affected by a sharp tax increase at the beginning of 2007. From a public health viewpoint, it is extremely unfortunate that the tax on snus was increased by more than the tax on cigarettes. Snus has an important role to play in efforts to reduce the harmful impact of cigarette smoking. This is evidenced by the Swedish experience, which shows a uniquely low share of regular smokers today, corresponding to 12 percent of the adult male population, combined with a lower incidence of tobacco-related illnesses than in any other comparable country.
International growth strategy
Organic growth in the tobacco industry is low. Our strategy of focusing on the market for smokefree products and cigars provides us with a favorable position in the main growth segments of the industry. Organic growth constitutes a cornerstone of our business model. This is most noticeable in the segment for smokefree products, where we maintain a leading position in the Scandinavian snus market while we are showing robust growth in the snuff category in the US.
At the same time, we are participating in the consolidation of the industry, primarily in the cigar segment. Through the acquisition of General Cigar, which was completed in 2005, Swedish Match has established a position as one of the leading players in the US cigar market. Our position in the European market has been strengthened through the acquisition of various brands, such as Hajenius, Oud Kampen, Bogart and Hollandia.
An important acquisition was completed in September 2007, when the fast-growing Cigars International Inc. was acquired in order to supplement Swedish Match’s traditional US distribution channels for cigars. Cigars International Inc. is an American distributor specializing in mail order and internet sales directly to consumers. The company has annual net sales of about 400 MSEK and mainly offers premium cigars from both Swedish Match and other manufacturers. The company’s customer database will constitute a unique asset for Swedish Match and provide opportunities for directly testing various product concepts.
The acquisition of Bogaert Cigars in mid-June 2007 enabled Swedish Match to further strengthen its position in Benelux, Germany and France. Bogaert Cigars, with net sales of about 170 MSEK, has a product portfolio comprising machine-made cigars/cigarillos under its own brands, Bogart and Hollandia, as well as private label cigars. Through Bogaert, we gain access to another factory in a low-cost country, Indonesia. Both of these acquisitions will generate a healthy contribution to earnings in our cigars product area in the years ahead.
In our other product areas, all opportunities to increase sales in various markets must also be capitalized on. During the year, our lighter operations noted a sales increase of 1.5 percent, marking a reversal in relation to the previously negative trend.
Our international growth strategy is supported by a regional, decentralized organization comprising three divisions, through which we have created a strong local market presence and the ability to provide new and innovative products to the market.
Strengthened organization and high tempo
During 2007, we strengthened the organization in the sales and marketing areas, and we will continue to strengthen this area in the years ahead. It is essential that we maintain a continued high tempo in terms of product development and new launches.
A successful launch of Red Man snuff throughout the US is high on the list of priorities for 2008. We believe that the snuff product area in the US offers the greatest potential for future growth and we expect a continued increase in our volumes and market share in the years ahead.
We are increasing our marketing investments and pursuing a more active price-segmentation policy in order to enhance our operating margin. An increased focus on selected, strong brands will be prioritized.
Returns to shareholders
The share price increased 20.7 percent during the year to 154.50 SEK, which can be compared with a decline of 5.7 percent for the OMXS30 index. It is proposed that the dividend be raised 40 percent to 3.50 SEK per share (2.50). The dividend proposal issued to the Annual General Meeting should be viewed in the light of the revised dividend policy, which indicates a dividend corresponding to 40–60 percent of earnings per share. During 2007, 2.6 billion SEK was also transferred to the shareholders in the form of share buybacks.
Outlook
The trend during the year confirms our strategic direction, characterized by focus on organic growth. We are continuing with programs to stimulate growth, primarily for snuff and cigars, with product development, new brand launches and market segmentation as key components. In these efforts, we will capitalize on changing consumption patterns in the tobacco area by offering consumers modern smokefree tobacco products and attractive cigars.
We are also evaluating appropriate acquisitions to complement operations, primarily in the cigar area. In addition to this, efforts aimed at enhancing the efficiency and productivity of production and distribution are continuing. We will also continue our programs aimed at becoming more market oriented and will work closely with consumers to capitalize on our established brand portfolio and identify new consumer trends and lifestyle patterns. In the financial area, we will continue to optimize the balance sheet in light of the substantial free cash flows that operations will generate and, thus, achieve an efficient return of capital to our shareholders.
These actions will lay the foundation for our continuing efforts to create value for customers, consumers and Swedish Match shareholders.
Swedish Match has a strong, highly motivated organization with skilled, professional employees worldwide, factors that provide the conditions for the company to develop successfully. The past year has entailed considerable progress in various areas, which will provide a platform for our continuing growth. I would like to extend a sincere thanks to all our employees for their excellent work and inputs to create an even stronger and even more successful Company.
Stockholm, March 2008
Sven Hindrikes
President and CEO
Source: Swedish Match Annual report 2007