News; Jul 26, 2005 CET

Stable sales and strong operating income

“Swedish Match’s sales continued to show a stable trend during the first six months of the year. For snuff, we can be pleased to note that volumes increased in Scandinavia and that market share increased in the US. Operating income increased strongly, and previously implemented rationalization measures began to show effects,” says Lars Dahlgren.

Sales for the first six months declined somewhat, but increased by 1 percent in local currency. Total sales for the first six months of 2005 amounted to SEK 6,351 M (6,377).

“It is primarily in the snuff product area that we experienced an anticipated decline in sales revenues as a consequence of the repositioning implemented in the US market. In the low-price segment, however, we are seeing strong growth,” comments Lars Dahlgren.

“In terms of volume and the number of packages sold, we are on par with the preceding year. However, we reduced the price of our mid-range Timber Wolf brand during 2004 and launched the low-price brand Longhorn on a broad scale. As a consequence, considering the six-month period as a whole, Longhorn increased its share of sales. At the same time, it is gratifying to note that delivery volumes for Timber Wolf were significantly higher in the second quarter than in the first.”

For cigars, the trend was stable during the first six months with largely unchanged volumes in Europe and for machine-made cigars in the US, while volumes for handmade premium cigars increased in the US.

During the second quarter, the minority share in General Cigar was acquired for SEK 1.1 billion. “General Cigar is the leader in the US market for handmade cigars, and we are proud that General Cigar is now a wholly owned subsidiary,” says Lars Dahlgren.

Operating income for the first six months of 2005 amounted to SEK 1,166 M, compared with the preceding year’s result of SEK 1,086 M after elimination of the extraordinary settlement income from UST during 2004. The operating margin for the first six months improved to 18.4 percent, compared with 17.0 percent a year earlier after elimination of the settlement income. Earnings per share improved to SEK 2.28, compared with SEK 1.95 for the first six months of 2004 with settlement income eliminated.

Snuff sales declined by 4 percent to SEK 1,503 M (1,565) and operating income by 1 percent to SEK 711 M (718). The decline was wholly attributable to the lower average prices in the US. At the same time, Swedish Match increased it market share in the US to 9.3 percent (8.9), according to data from Nielsen, which provides an independent measurement of market share. During the second quarter, sales volumes increased.

In Sweden and Norway, total volumes increased by 1 percent. In the Nordic market, operating income also increased as a result of higher volumes, lower overhead costs due to organizational changes and somewhat higher average prices.

“In Sweden, we see a continued stable and mature market. According to the latest Nielsen survey, Swedish Match now has 95 percent of the Swedish market. In Norway and in duty-free stores, we have seen significant growth both in the total market and in our deliveries,” says Lars Dahlgren. “We also see a continued positive trend for the product mix where the sales of pouched snus are increasing in the Swedish market, while sales of loose snus are declining. Today, pouched snus accounts for 57 percent of sales, compared with 55 percent a year ago.”

The operating margin for the Snus product area was 47.3 percent (45.9).

Sales of cigars increased by 3 percent to SEK 1,574 M (1,533). In local currency, sales increased by 6 percent. Stable volumes in Europe and for machine-made cigars in the US, a volume increase for handmade cigars in the US and higher average prices were the underlying reasons for the sales increase.

Operating income for the first six months declined by 13 percent to SEK 248 M (285). “Integration costs for General Cigar totaling SEK 75 M were charged against operating income. Excluding these costs, the operating margin was strong at 20.5 percent, and the integration of General Cigar is expected to result in significant savings in the future,” notes Lars Dahlgren.

For both chewing tobacco and pipe tobacco, the trend is toward declining consumption. Nonetheless, sales of pipe tobacco increased somewhat. Better price levels and a stronger South African rand compensated for reduced volumes. Sales during the first six months of the year amounted to SEK 434 M (425), while operating income increased to SEK 115 M (112). The operating margin increased to 26.6 percent (26.4).

For chewing tobacco, sales in SEK over the first six months declined by 5 percent to SEK 509 M (536) and operating income fell by 1 percent to SEK 152 M (155). The decline in sales was mainly due to a weaker average exchange rate for USD during the first half of the year. The recent strengthening of the dollar has not yet had an impact on sales to any significant extent. Cost controls and higher average prices resulted in operating income increasing somewhat in local currency. The operating margin amounted to 29.9 percent (28.8).

For matches, sales during the first six months of the year were largely unchanged and amounted to SEK 663 M (664).

Operating income amounted to SEK 14 M (loss: 56). Costs of SEK 31 M for the closure of a match plant in Valencia, Spain were charged against earnings in the first quarter of 2005. The figures for last year included costs of SEK 105 M for restructuring of match operations in Europe.

During the second quarter, sales and operating income showed a positive trend. Sales increased by 8 percent to SEK 369 M (340), and operating income amounted to SEK 30 M (loss: 37 or profit 22 after elimination of restructuring costs during the second quarter of 2004).

Sales of lighters increased by 2 percent during the first six months of the year to SEK 298 M (293). Volumes increased, but the average price per lighter declined. Operating income increased to SEK 28 M (17), and the operating margin rose to 9.2 percent (5.8).

During the second quarter, sales developed well and increased by 6 percent to SEK 155 M. Operating income rose at the same time by 76 percent to SEK 15 M. “Constant rationalization and improved productivity were the reasons for the improvement in earnings,” says Lars Dahlgren.

At the end of the period, the Group had a net debt of SEK 2,531 M, compared with SEK 527 M at December 31, 2004, an increase of SEK 2,004. The increase was primarily due to the acquisition of the minority share in General Cigar at a cost of SEK 1,099 M, share repurchases totaling SEK 895 M and a dividend of SEK 612 M.

After registration of the 12 million shares that were recalled according to the decision by the Annual General Meeting, which is expected to take place during the autumn, repurchasing of own shares is expected to continue. “With strong cash flows and stable earnings, we are able to continuously transfer funds to shareholders in the form of dividends and repurchases of our own shares,” says Lars Dahlgren.

On July 1, Swedish Match sold its 74-percent share of the Indian match company Wimco to the Indian Tobacco Company (ITC). “Marketing of snus in India ceased last year, and the sale of Wimco was thus a natural step in the restructuring of match operations,” concludes Lars Dahlgren.