News; Jun 24, 2002 CET

Our strategies showed their strength during 2001

Last year was something of a breakthrough for Swedish Match unique strategy, with growing international attention focused on oral snuff as a smokeless alternative and a highly positive reaction from the stock market, commented Lennart Sund謠in his address to the Annual General Meeting on April 23. Our strategies fore the next few years prioritize continued organic growth, special efforts to utilize the potential for improving margins and making selective acquisitions, and optimization of the capital structure.

In an international perspective, fiscal 2001 was a difficult year. The sustained boom during the 1990s was reversed and we saw weakened corporate results and falling share prices. Given such a background, it is particularly gratifying to note
the qualities displayed by our own company. Two thousand and one was a successful year for the Swedish Match Group. The strategies that we have worked with during the past three years showed their strength and helped create substantial value for shareholders.

ALLOW ME TO REVIEW some of the highlights of this development:

  • Sales rose by 18 percent to 13,635 MSEK. Our high level of organic growth, 8 percent for the second successive year, is particularly worth noting. This figure is not only unique to us in our sector but is also unusual compared with most established industrial companies - especially during a recession.»
  • Operating income increased by 16 percent to 2,193 MSEK - a result that demonstrates not only the powerful growth within the Group but also the
    effects of our restructuring and rationalization programs.
  • Earnings per share increased by 28 percent, excluding items affecting comparability, to SEK 3.54. In addition to the Group’s favorable earnings trend, our share buyback program contributed to an improvement in key ratios. The purpose of the program, among other aims,
    is to enable us to work continuously to optimize our capital structure to benefit shareholders.

SINCE YOU HAVE ALREADY HAD an opportunity to read about all these factors in our Annual Report, allow me to both broaden and deepen the perspective in a review of the Group and its strategies extending from past history and on into the future.

The starting point for our work is to create value for our shareholders. In an industry that is not showing substantial growth, and in which insight into the health risks of cigarette smoking is increasing, Swedish Match has repositioned its operations - by turning the challenges facing the industry into business opportunities.

Since the divestment of our cigarette operations in 1999, one idea has been paramount - to make Swedish Match into a unique tobacco company through a consistently applied niche strategy. Through our acquisitions, primarily in the cigar segment, and the continuation of our consistent focus on snuff, we have rapidly become the international leader in niche tobacco products.

The term ›unique‹ is multifaceted - it can easily become an epithet designed to mask conceit rather than a statement of anything meaningful. But I am prepared to take the risk, because if it is used properly the term has high potential value for both the Company and its shareholders.

The Board of Directors and management of Swedish Match devote considerable energy to formulating and constantly developing Group strategies and then following them consistently. It is crucial for this work that we actively seek out unique and unrepeatable opportunities for the Group. It is not sufficient merely to be a well-managed
company just like many other companies.

As one of the smaller international players in a large and special industry, it is vital for Swedish Match to differentiate its operations, to dare to be different. The Group’s long and unique experience of snuff gave us the opportunity to focus - in good time, and early - on a consumer trend that has the future before it: the smokeless alternatives.

breakthrough for this unique strategy in our industry. I am alluding, among other things, to the interest focused on Swedish ›snus‹ (moist snuff) in the international scientific debate on smoking and its effects on health. Under the heading ›The Swedish Experience,‹ highly reputable magazines have identified Swedish snus as a realistic and effective alternative to cigarette smoking.

The international debate is currently focusing on such statistics as the fact that Sweden has more snus consumers than smokers among its male population, that 50 percent of all snus consumers are former cigarette smokers, and that Sweden has the lowest rate of tobacco-related illnesses in
the Western World. Sweden is also the only country that achieved the target set by the World Health Organization - that less than 20 percent of the adult population should be smokers. Swedish Match is, entirely justifiably, identified with this trend. We now increasingly often receive requests from various international discussion and research forums to pass on our knowledge and experience regarding Swedish snus.

lies a combination of our 30 years of research
and development and the marketing campaigns promoting snus during the past few

years. We have created our own product category with a unique quality standard - GOTHIATEK® - that was launched last year. GOTHIATEK® markets our quality program for the entire life cycle of the products - from the cultivation and curing of the tobacco to the production, storage and sale of snus.

Our best argument is that several studies in Sweden have shown that suspicions that snus could have cancer-causing effects lack scientific support. It was therefore a welcome reward for our efforts when the European Commission decided last year that cancer warnings need no longer be
printed on snus cans. While we do not expect rapid progress, this should represent a step toward a political decision to abolish the almost bizarre EU ban on snus.

Our snuff strategy is naturally complemented by our aim to relatively rapidly build up a world position in cigars, an area where consumption is often geared toward socially accepted ›pleasurable occasions.‹ The acquisitions
that we have made during the past few years - and have reported on periodically - provided an exceptionally effective complement to the strength in terms of global marketing and distribution that the Group had long possessed thanks to its match and lighter operations. Here was a unique opportunity that we were able to utilize - our strong global distribution network. This will give us additional competitiveness as we proceed with our focus on cigars.

Through our differentiation based on smokeless alternatives and pleasure-oriented brown tobacco products, combined with our global distribution strength, we have created a Group structure that today constitutes a meaningful whole. I am pleased to be able to confirm that all parts of the Group are functioning well today, following the implementation of a restructuring and efficiency-enhancement program in the match and lighter operations.

IF ASKED TO SUMMARIZE our strengths for you as shareholders, I would highlight the following:

  • Insensitivity to economic trends: Demand for our products is affected very little by economic fluctuations. Brand loyalty is exceptionally high in our sector. The current recession demonstrates this old truth.
  • Organic growth. We have focused on those segments that are experiencing organic growth, and in which we have world-leading positions. Overall consumer trends also support our choice of strategic focal points. This growth more than offsets those segments where we face stagnating demand but - and it is an important ›but‹ - where
    we can anticipate a favorable and stable cash flow for some years to come.
  • Strong brands and market positions. Once again, we benefit from a high degree of brand loyalty, behind which lie many years of systematic marketing work. This gives us considerable stability. It is always difficult to estimate the value of our brands, but it is interesting to observe both the transactions occurring in other brandfocused sectors, such as the soft-drinks industry and the markets for various luxury brands, and those taking place in the tobacco industry. When brand assets are put up for sale, the price is high.
  • High margins. We are building positions in product niches that have the potential to generate high margins. Efficient production and distribution, combined with our market-leading positions in niche products, give us an advantage.
  • Strong cash flows. Swedish Match has current free cash flows that normally exceed SEK 1 billion. A cautious and selective acquisition policy, combined with carefully assessed investments, will ensure that a large portion of this cash flow benefits shareholders, without jeopardizing the Group’s long-term growth.

will be following during the next few years is to further develop these strengths. Efforts will focus on the following prioritized areas:

  • We will continue to focus on organic growth, particularly in the area of smokeless tobacco products. We will be focusing on an ongoing series of product launches and marketing campaigns and further developing programs that have already been initiated. We have an international strategy for snuff. In the cigar segment, we have excellent potential for further
    strengthening our market positions, thanks to our global distribution network. We also intend to pursue research and development aimed at further improving quality and finding new smokeless alternatives.
  • We have additional potential for improving
    margins. We shall increase our efforts to reduce costs and increase efficiency in everything we do. We have already initiated programs to concentrate our European cigar production and rationalize cigar operations in the US. We will always seek and find opportunities to rationalize, as a normal part of our day-to-day work.
  • Acquisitions are and will continue to be part of our strategy, particularly in view of the expectation that our industry will undergo a consolidation in the foreseeable future. We will be highly selective and seek acquisitions that have high potential for rapidly achieving profitability based on limited investment.
  • Finally, we will continue our work to optimize
    the Group’s caital structure. This priority has been on our agenda ever since the change of strategy three years ago. After implementing a major redemption program totaling SEK 1.2 billion in 1998 and another program worth SEK 1 billion
    in 2000, repurchase of shares has become our primary tool in our ongoing efforts to optimize the capital structure in the balance sheet and transfer profits to shareholders, in addition to dividends.

SUBSTANTIAL TRANSFERS OF CAPITAL to shareholders have been possible as a result of
share redemption and buyback programs and a good dividend. During the past three years, payments based on these schemes have amounted to 65 percent of net profit. Against the background of the Group’s stable and healthy cash flow, the Board of Directors takes a positive view of the share buyback program, provided it has no negative
impact on the Group’s long-term capital requirements and expansion possibilities. The buyback programs implemented to date have proved to be a greatly appreciated and efficient method for transferring profits to shareholders, as well as strengthening the Group’s key ratios and thus
increasing the attractiveness of the share in
the stock market. This is fully in line with the Group’s emphasis on creating shareholder

Accordingly, the Board proposes to the Annual General Meeting that the dividend be increased and that it be given a mandate for continued share buybacks.

Finally, I would like to comment on the results for the first quarter of 2002. The year began well for the Group. Sales increased by 8 percent to 3,317 MSEK. It is pleasing to note that organic growth continued at a rate as high as 6 percent - in a stagnating sector and an ongoing recession. Operating income increased by 23 percent to 605 MSEK. This is a strong performance,
primarily attributable to improved margins that reflect the volume increases for snuff, lower marketing costs and price increases.

IF I MAY FOCUS ON a couple of particularly
interesting trends during the quarter, I would like to highlight the excellent performance of snuff and matches in particular.

Historically, we have experienced volume increases of 4-5 percent for snuff, but the first-quarter increase in snuff volumes, measured in terms of cans sold, was 10 percent in Northern Europe and 15 percent in the US, where our market share increased further and is now around 9 percent. The operating margin for snuff increased to 43 percent. Operating income for matches increased by a full 48 percent to 65 MSEK during the period, while the operating margin improved strongly to 14 percent.

Cigar sales increased by 4 percent to 778 MSEK and operating income increased by 21 percent.

Overall, the first quarter yielded a healthy increase in earnings per share for you the shareholders - up 28 percent. Before we consign 2001 and the first quarter of 2002 to history, I would like to express my sincere thanks to all our shareholders for the interest you show and the
confidence you place in us. Your confidence is our
principal driving force. Thank you. «