News; May 12, 2005 CET

Stable start to the year

“The first quarter of 2005 got off to a stable start, laying a solid foundation for the coming quarters,” says Lars Dahlgren, Swedish Match’s CFO, in his analysis of the results for the first quarter. “Growth continued in the Cigars product area, and we take a positive view of how the Timber Wolf snus brand has performed in the US market.”

Sales during the first three months of the year were on par with the year-earlier period. Sales increased by 1 percent in local currencies, but declined by 1 percent when translated to SEK. Expressed in absolute figures, sales amounted to 2,967 MSEK (3,002). The success of flavored cigars continued in the US, and all the indications are that a loyal customer group has been established. However, snuff in the US has entered what might be called a transitional phase. The repositioning of Timber Wolf has initially brought a decline in sales value, but the trend is heading in the right direction.

Operating income for the first quarter amounted to 528 MSEK. If the nonrecurring settlement revenue secured during 2004 is excluded, this represents a 4-percent increase over the preceding year. The operating margin during the first quarter improved to 17.8 percent (16.9, excluding the settlement revenue).

Snuff sales declined by 6 percent to 703 MSEK (751). The decline is attributable to the repositioning of Timber Wolf and to negative currency effects resulting from the continued weakness of the USD.

The market for snuff in the lower price categories is growing in the US, and the product portfolio was adapted accordingly and the price of Timber Wolf reduced during the last quarter of 2004. Since the repositioning, sales volumes have increased month by month. “The positive trend confirms that the repositioning was a good move,” says Lars Dahlgren. “Although it may take a while before all consumers become aware of the new reduced price, we see considerable potential for continued growth.”

The total sales volume in North America, measured in terms of the number of cans sold, remained unchanged. The lower volumes for Timber Wolf were offset by the growth of Longhorn. Longhorn was launched on a broader scale in the low-price segment during 2004, and has subsequently continued to grow and strengthen its position. Since an increasing number of competitors have become aware of the growth taking place in the low-price segment, we are preparing for Longhorn to face increased competition in the future.

In Sweden, we noted a weakening of market growth during the period. Swedish Match’s volumes declined by about 1 percent, including tax-free sales, but this was offset by a better product mix and reduced costs. Sales volumes of portion-packed snus continue to increase and now account for 57 percent of sales. The continued increase in volumes in Norway was a further compensatory factor.

Operating income for snuff as a whole was affected by the measures taken in the US market and declined by 8 percent to 324 MSEK (354). The operating margin amounted to 46.0 percent (47.1).

For cigars, sales continued to increase and volumes rose in most markets. First-quarter sales rose by 7 percent to 734 MSEK (687). Volumes continued at a strong level for machine-produced cigars in the US. New flavors were launched, and the growth in this segment is particularly encouraging, considering the strength of the first quarter of 2004.

Premium cigars, a segment in which Swedish Match is the market leader in the US, also showed favorable volume growth. In April, Swedish Match acquired the shares outstanding in General Cigar, which will further strengthen the Group’s position in this segment. “We now look forward to further developing our cigar business and General Cigar’s exceptionally strong brands, both in the US and internationally,” says Lars Dahlgren.

Another source of strength is that the market-related and structural measures in Europe have begun to yield results and Swedish Match has gained market shares in several important markets.

Total operating income for cigars for the first three months improved to 136 MSEK (129), an increase of 6 percent. In local currencies, operating income rose 10 percent. The operating margin amounted to 18.6 percent (18.8).

Consumption of chewing tobacco and pipe tobacco shows a declining trend, which is reflected in the Group’s sales volumes. The level of sales and earnings in local currency was nevertheless maintained as a result of improved productivity and better price levels.

For chewing tobacco, sales and operating income rose slightly in local currency. Due to the weaker USD, however, sales and operating income in SEK declined 5 percent to 242 MSEK (254) and 69 MSEK (73) respectively, while the operating margin amounted to 28.6 percent (28.7).

Sales and earnings for pipe tobacco during the first quarter were on par with the preceding year, although volumes declined in most markets. Sales amounted to 216 MSEK (211), operating income to 60 MSEK (60), and the operating margin to 27.6 percent (28.4).

Sales of matches declined during the first three months of the year and earnings continued to be weak. Volumes declined in most markets, partly as a result of the high inventory levels held by customers at the beginning of the year. Sales totaled 294 MSEK (324), a decline of 9 percent, and earnings were a negative 17 MSEK (negative: 19). Costs of 31 MSEK for the closure of the match plant in Valencia, Spain, were charged against first-quarter earnings, while restructuring costs of 46 MSEK were charged against earnings during the first quarter of 2004. The Matches product area has been burdened by overcapacity as a result of declining volumes over a number of years. The closure of the Valencia plant is expected to result in improved profitability, but further adjustments may be needed. “Our aim is to adapt the organization and production to the competition situation and market demand, thereby creating match operations with sustainable profitability,” says Lars Dahlgren.

Sales of lighters declined by 2 percent to 143 MSEK (146) during the first quarter. Volumes increased marginally and operating income rose to 12 MSEK (8). The operating margin was 8.6 percent (5.7). “This is the level of margin that can be expected when there are no restructuring costs to charge against earnings,” notes Lars Dahlgren. “Unfortunately, the lighter segment is exposed to extreme pressure on prices, which may mean that further rationalizations will be needed in the future to keep the Group’s lighters competitive.”

The Group continues to generate strong cash flows. Cash flow from operations during the period amounted to 417 MSEK, while liquid funds, including current investments, increased from 3,002 MSEK to 3,243 MSEK at the close of 2004. As a result, the Group’s net loan debt at the end of March was at a record-low 332 MSEK. Net loan debt is expected to rise during 2005, however, when the dividend to shareholders and the purchase price for the shares outstanding in General Cigar fall due for payment during the second quarter.

Over the years, Swedish Match has transferred value to shareholders through share buybacks. This favors shareholders, since the company’s value is divided among fewer shares outstanding. The dividend for 2004 was also raised by 12 percent to 1.90 SEK per share. “Although no shares were repurchased during the first quarter, the future buyback capacity increases the scope for this method of transferring funds to shareholders,” concludes Lars Dahlgren.