Another strong and eventful quarter
The third quarter was strong for Swedish Match. Sales increased for all product groups, excluding divested operations, while operating income of 747 MSEK before a capital gain from the sale of an office property represents a new record.
Operations went well during the third quarter. Snus sales rose and the increase in volumes continued in both Scandinavia and the US. In Scandinavia, growth in volumes was especially notable in Norway, as well as in tax-free stores. In the US, the low-price brand Longhorn, which was launched on a broad scale during 2004, continued to capture market shares. As a result of increased sales and lower costs, quarterly earnings for snus exceeded 400 MSEK for the first time.
Cigars also delivered a generally favorable quarter, and it is a highly positive sign that we have already achieved the target set for next year of an operating margin amounting to 21-23 percent, notes Lars Dahlgren.
However, machine-made cigars in the US faced a tougher market situation, resulting in a decline in volumes and a deterioration in profitability. For hand-rolled cigars in the US, on the other hand, profitability continued to be favorable, and the task of integrating General Cigar following acquisition of the minority interest earlier this year is proceeding according to plan. General Cigars head office in New York was divested during the quarter, and the administration will be moved to Richmond, Virginia, where the North America division has its head office. The divestment yielded a capital gain of 206 MSEK. In Europe, market shares were captured in several key markets and sales increased. The rise in sales, combined with reduced costs, resulted in substantially improved earnings for cigars in Europe. Overall, operating income for cigars increased by 8 percent to 188 MSEK for the quarter, excluding the capital gain of 206 MSEK.
The only product group to show lower earnings for the quarter was pipe tobacco and accessories. This was the result of price pressure on certain accessories and lower volumes.
Volumes are also in continuous decline for chewing tobacco, says Lars Dahlgren. But despite this trend, we again managed to improve earnings, with better prices and lower costs compensating for the loss of volumes. In addition, the gradual strengthening of the dollar during the year produced a positive translation effect for chewing tobacco during the quarter, given that chewing tobacco is sold almost exclusively in the US.
Lighters and matches constitute a steadily decreasing proportion of sales. During the third quarter, these two product groups accounted for 13 percent of Group sales, and rationalization measures are continuing. Lighters have had a relatively strong year to date, with earnings increasing as a result of higher volumes and structural measures implemented earlier. Operating income for the quarter amounted to 16 MSEK, compared with 6 MSEK for the year-earlier period. Matches also had a positive quarter, with operating income of 31 MSEK, compared with 28 MSEK for the third quarter of 2004.
Despite it being the middle of summer, we also concluded a corporate transaction during the third quarter, selling our 74-percent holding in the Indian match company Wimco Ltd. to the Indian Tobacco Company, says Lars Dahlgren. The divestment of Wimco is part of the ongoing restructuring of the Matches product area and means that we have now totally withdrawn from India.
In the finance department, work is also in full swing in preparation for the auditors examination of the Groups internal control systems as required by the US Sarbanes-Oxley Act. The examination is scheduled to take place during 2006, but all control systems will be tested internally at the beginning of the year.
The reason why we are subject to US legislation is that we were previously listed on the NASDAQ Exchange in the US, explains Lars Dahlgren. The Sarbanes-Oxley Act imposes far-reaching requirements concerning documentation of business processes, and implementing the requirements involves substantial costs and use of resources. For a company as stable as Swedish Match, it is questionable whether the introduction of all the new procedures justifies the expense. We already have a highly sophisticated system of internal controls, which is scrutinized by our auditors every year, although it does not necessarily fulfill all the requirements in the US legislation, concludes Lars Dahlgren.
