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Press release; Aug 9, 1998 10:00 PM CET

Interim Report January - June 1998

  • Consolidated sales rose to SEK 3,814 M (3,626).
  • Operating profit amounted to SEK 650 M (741).
  • Net profit amounted to SEK 356 M (528).
  • Intensified efforts to increase efficiency of production plants.
  • Items affecting comparability against income amounted to SEK 108 M.
  • Continued sharp increase in sales and operating profit for snuff.

 

Swedish Match sales during the first six months of 1998 rose 5% to SEK 3,814 M, compared with SEK 3,626 M during the corresponding period in 1997.

Operating profit declined to SEK 650 M, down from SEK 741 M. An item affecting comparability amounting to SEK 48 M was charged against operating profit for the period.

The Snuff Division reported continued strong growth, with a sharp increase in sales and operating profit. The Cigarette Division’s sales and operating profit declined due to lower volumes in the Swedish market.

 

Summary of Consolidated Income Statement

SEK M

First six months

 

1998

1997

Sales

3,814

3,626

Operating profit

650

741

Profit after financial items

560

758

Net profit

356

528

Sales by Division

SEK M

First six months

 

Percent

12 months
ended

Full year

 

1998

1997

change

June 30,98

1997

Chewing Tobacco

532

556

-4

1,125

1,149

Cigarettes*

690

779

-11

1,457

1,546

Cigars

412

337

22

766

691

Lighters

380

437

-13

777

834

Matches

667

652

2

1,314

1,299

Pipe Tobacco

105

78

35

193

166

Snuff

625

505

24

1,199

1,079

Group-wide operations

And eliminations*

403

282

43

822

701

Total

3,814

3,626

5

7,653

7,465

* After May 1, 1997, external invoicing of Prince cigarettes is reported under Group-wide operations. Subcontracted production remains within the Cigarettes Division. The change means that of total sales of Prince during the January–June 1998 period, which amounted to SEK 220 M, SEK 71 M was reported in the Cigarettes Division and SEK 149 M in Group-wide operations.

Operating Profit by Division

SEK M First six months Percent

12 months ended

Full year
  1998 1997 change June 30, 98 1997
Chewing Tobacco

180

197

-9

403

420

Cigarettes *)

184

238

-23

483

537

Cigars

63

57

11

137

131

Lighters

17

23

-26

47

53

Matches

65

69

-6

143

147

Pipe Tobacco

21

14

50

35

28

Snuff

301

232

30

591

522

Group-wide operations

and eliminations *)

-133

-89

 

-296

-252

Item affecting

Comparability

-48

   

-48

 
Total

650

741

-12

1,495

1,586

*) Most of the contribution from sales of Prince cigarettes is reported under the Cigarette Divison.

Chewing Tobacco

The Chewing Tobacco Division operates solely in the North American market, primarily in the U.S.

Sales during the first six months of 1998 amounted to SEK 532 M, a decline of SEK 24 M, or 4%, compared with the first six months of 1997. Expressed in local currencies, sales were down 10%. The decline in sales was due primarily to total market decline, somewhat lower market shares and hoarding (stockpiling) at the retail level during the fourth quarter of 1997. The market was characterized by more intense price pressure.

Operating profit declined 9% to SEK 180 (197), due mainly to volume decline.

 

Cigarettes

The Swedish market accounts for 75% of sales invoiced by the Cigarettes Division. The Division also sells cigarettes in Estonia and duty-free outlets, as well as filters and cigarette papers in the U.K.

Sales during the first six months of 1998 amounted to SEK 690 M, a decline of SEK 89 M, or 11%, compared with the first half of 1997. Hoarding in the Swedish market toward year-end 1996 had an adverse impact, estimated at SEK 75 M, on sales during the first quarter of 1997. The new agreement regarding Prince cigarettes, which became effective on May 1, 1997, had a negative effect on sales from the Division of approximately SEK 110 M, compared with the first six months of 1997.

During 1997 the tobacco tax on cigarettes in Sweden was raised 63%, which caused a sharp increase of illegal trade. Regular deliveries to the total Swedish Market declined from approximately SEK 3 billion cigarettes during the first half of 1997 (without the hoarding effect, the figure would have been approximately 3.35 billion) to about 2.5 billion cigarettes during the first half of 1998.

Operating profit was down 23% to SEK 184 M (238). The effects of hoarding on operating profit toward year-end 1996/1997 have been estimated at approximately SEK 45 M. Higher marketing costs caused by the re-launch of Blend cigarettes were charged against income for the period. Production rationalization measures had favorable effects on operating profit.

Cigars

The Cigar Division is one of the world’s largest manufacturers of cigars and cigarillos. Western Europe is the most important market.

Sales during the first six months of 1998 totaled SEK 412 M (337), an increase of 22% compared with the first half of 1997. Two new operating units have been consolidated in 1998: cigar operations in Finland and Swedish Match Australia Pty. The operations contributed sales of SEK 60 M during the first half of 1998.

Operating profit amounted to SEK 63 M (57). Substantial costs for intensified marketing in the U.S. had a negative effect on operating profit.

Lighters

Swedish Match is the world’s third largest manufacturer of disposable lighters. The most important markets are Western Europe, Eastern Europe, the U.S. and parts of Asia.

Sales during the first half of 1998 declined 13% to SEK 380 M (437). Volumes fell in Asia/Pacific and in North America and prices were down in Asia/Pacific.

Operating profit declined by SEK 6 M to SEK 17 M. Productivity improvements did not compensate fully for the negative effects of lower prices and volumes on earnings.

Matches

The Match Division is the world’s only global manufacturer of matches. Sales by the Division are concentrated primarily in Europe and Brazil, although large export volumes are sold to approximately 100 other countries. The Division also manufactures match production equipment through Swedish Match Arenco.

Sales during the first six months of 1998 amounted to SEK 667 M (652). Lower volumes of match sales, particularly in Europe, were offset in part by higher sales invoiced by Arenco.

Operating profit was down SEK 4 M to SEK 65 M. Productivity improvements yielded favorable effects on profit, which were offset by lower volumes.

During the period under review, additional shares in PLAM Bulgarski Kibrit JSCO were acquired, bringing Swedish Match’s holding to more than 90%. Sales by the Bulgarian company during the first half of 1998 amounted to approximately SEK 10 M.

Swedish Match Kav, the Turkish match company, was consolidated for two months during the period. Sales in the first half of 1998 totaled SEK 11 M.

Additional shares have been acquired in the two investment companies in Singapore that own 39% of the shares in Wimco Ltd., India. The holding in the investment companies is thereafter 94%. Wimco is included in this interim report as an associated company.

Swedish Match intends to terminate production of advertising matches in Geraardsbergen, Belgium. Production is being transferred to the factory in Szeged, Hungary. Total costs of the transfer are estimated at SEK 48 M.

Pipe Tobacco

The Pipe Tobacco Division is one of the world’s largest manufacturers of pipe tobacco. Principal markets for the Division are the U.S., Sweden and the rest of Western Europe.

Sales rose 35% to SEK 105 M (78). Operating profit improved by SEK 7 to SEK 21 M. The takeover of the right to market Borkum Riff in the U.S. had a favorable impact on the Division’s sales and operating profit.

Snuff

The Snuff Division’s largest markets are Sweden (incl. duty-free sales) and the U.S.

Sales during the first six months of 1998 amounted to SEK 625 M (505), an increase of 24% over sales in the year-earlier period.

Swedish Match’s share of the U.S. market continued to increase during the first half of 1998, rising to 4.1% (2.8). At year-end 1997 the market share was 3.2%. The Swedish market, including duty-free sales, rose in volume by about 4% compared with the year-earlier period.

The price of Timber Wolf in the U.S. market was raised from USD 0.70 to USD 0.90 during the first quarter of the year, in line with a price hike previously implemented by US Tobacco. The corresponding price during the first half of 1997 was USD 1.10, which was reduced in August of the same year due to intensified price competition.

Operating profit rose 30% to SEK 301 M (232) on the strength of higher volumes in Sweden (including duty-free) and the U.S., as well as improvements in the Swedish product mix. Stronger focus was placed on marketing in both Sweden and the U.S. during the second quarter.

Group-wide operations

The net costs for the Group-wide operations increased to SEK 133 M (89). The figure includes sponsorship costs for participation in the Whitbread Round the World Race and costs incurred for the Swedish Match Global Challenge, an internal project. The sponsorship will be terminated during the third quarter 1998.

Acquisitions

Swedish Match has established its own operation in Australia during the first half of 1998 through Swedish Match Australia Pty. Limited. The company has acquired an extensive, national distribution network for sales of tobacco and tobacco-related products from the Alexander Group. Sales from operations in 1997 amounted to SEK 60 M.

Swedish Match has also acquired the match, lighters and fireplace matches operations of Bryant & May, another Australian company. The acquisition includes inventories, equipment, goodwill, trademarks and the Bryant & May company name in Australia. The acquisition is expected to increase consolidated sales by about SEK 50 M annually.

Financial Results

Net interest expense during the first half of 1998 totaled SEK –17 M (expense: 7). Other financial items, a net expense of SEK 13 M (income: 24), are attributable primarily to exchange rate movements related to financial assets and liabilities, as well as costs incurred for the redemption program. In addition, a provision was reported for risks totaling SEK 60 M to cover the Group’s financial exposure in Southeast Asia.

Investments, Financing and Liquidity

Group investments during the first half of 1998 amounted to SEK 261 M (121). Depreciation according to plan totaled SEK 159 M (142). Cash and bank balances, including short-term investments, totaled SEK 862 M at the close of the period, compared with SEK 563 M at the beginning of 1998. Net debt at the close of the period totaled SEK 1,016 M, an increase of SEK 545 M since December 1997.

Average Number of Group Employees

The average number of Group employees during the first half of 1998 was 7,057, compared with 6,272 in the first half of 1997. The average number of employees in Sweden was 1,467, compared with 1,475 last year.

Tobacco Tax

During the past 12-month period, total tobacco tax and value-added tax on tobacco products paid by Swedish Match in Sweden amounted to SEK 9,812 M (9,197).

Significant Events after the End of the Reporting Period

Reduction of tobacco tax in Sweden

Swedish Parliament has resolved to reduce the tobacco tax imposed on cigarettes in Sweden, effective August 1, 1998. As a result, the unit price per cigarette will be reduced from SEK 0.85 to SEK 0.20, while that portion of taxes related to the retail price will be raised from 17.8% to 39.2%. Swedish Match will adjust its prices at the same time. Price cuts for major products are shown below.

 

Sale price
Swedish Match

Retail sales margin

Sales and value added tax

Price paid by consumer

 

Before 8/1/98

After 8/1/98

Before 8/1/98

After 8/1/98

Before 8/1/98

After 8/1/98

Before 8/1/98

After 8/1/98

Blend Gul
Cigarettes

(highest fixed price)

5.28

5.17

5.40

4.91

33.82

24.42

44.50

34.50

 

Redemption

On July 7, 1998, an extraordinary general meeting of Swedish Match resolved to approve the redemption of 34,752,689 shares at a redemption price of SEK 35 per share. The total redemption amount, accordingly, is SEK 1,216 M, which was transferred to shareholders who had applied for redemption at the end of July. The extraordinary general meeting also approved a bonus issue of shares to be effected by increasing the par value of Swedish Match shares from SEK 2.00 to SEK 2.20. In conjunction with redemption, a special issue of new shares in the amount of SEK 69.5 M was also effected. After the transactions reviewed above, the total number of shares outstanding was 431,339,663.

Outlook

Efforts to increase the efficiency of Group production plants have been intensified this year. Decisions on additional rationalization measures are expected during the second half of 1998. Costs for the proposed structural changes have been estimated at approximately SEK 100 M. Savings from the rationalization program will yield favorable effects on income beginning in 1999. Within the framework of its declared business strategies, Swedish Match also plans to assume an active role in the search for suitable structural transactions in the tobacco industry.

Other Information

This report has not been reviewed by Swedish Match auditors.

The interim report for operations during the nine-month period ended September 30, 1998 will be published on October 23, 1998.

G?? Lind?/p>

President and Chief Executive Officer

Consolidated Income Statement in summary

SEK M

First six months

Percent

12 months
ended

Full year

 

1998

1997

change

June 30,1998

1997

Sales, incl. tobacco tax

7,719

7,175

8

15,775

15,231

Less tobacco tax

-3,905

-3,549

-10

-8,122

-7,766

Sales

3,814

3,626

5

7,653

7,465

Cost of goods sold

-1,886

-1,775

6

-3,726

-3,615

Gross profit

1,928

1,851

4

3,927

3,850

Sales and administration

costs, etc

-1,236

-1,119

10

-2,398

-2,281

Share of earnings in

associated companies

6

9

-33

14

17

 

698

741

-6

1,543

1,586

Item effecting comparability*

-48

-

-

-48

-

Operating profit

650

741

-12

1,495

1,586

Net interest expense

-17

-7

 

-27

-17

Other financial items, net

-13

24

 

-48

-11

Risk exposure

-60

   

-60

 
Net financial items

-90

17

 

-135

-28

Profit after financial items and minority interests

560

758

-26

1,360

1,558

Taxes

-206

-226

9

-492

-512

Minority interest

2

-4

 

5

-1

Net profit

356

528

-33

873

1,045

*Tranfer of production from Geraardsbergen, Belgium

Consolidated Balance Sheet in summary

SEK M

June 30, 1998

Dec 31,1997

Intangible fixed assets

876

757

Tangible fixed assets

2,410

2,226

Financial fixed assets

296

308

Current operating assets

3,242

3,125

Current financial receivables

143

153

Cash and bank

862

563

Total assets

7,829

7,132

Shareholders’ equity

2,787

2,972

Minority interests

79

20

Provisions

752

656

Long-term loans

655

209

Other long-term liabilities

33

27

Short-term borrowings

1,223

825

Other current liabilities

211

290

Current operating liabilities

2,089

2,133

Total equity, provisions and liabilities

7,829

7,132

     
Operating capital

4,439

3,975

Net debt

1,016

471

 

Key Data

 

12 month ended
June 30, 1998

Full year
1997

Operating margin, %*

20.2

21.2

Return on operating capital, %*

38.8

42.7

Return on shareholders' equity, %

33.1

39.5

Interest coverage ratio, times

16.0

24.9

Debt/equity ratio, %

35.5

15.7

Equity/assets ratio, %

36.6

41.9

Investments, SEK M

294

292

Average number of employees

7 057**

6,467

Share data    
Income per share after full tax,    
before items affecting comparability

after items affecting comparability

Shareholders’ equity per share, SEK

2.07

1.88

6.01

2.25

2.25

6.41

Number of shares outstanding

463,558,252

463,558,252

* Before item affecting comparability

** First six months 1998

Quarterly Data

SEK M

Q1/97

Q2/97

Q3/97

Q4/97

Q1/98

Q2/98

Sales, incl. tobacco tax

3,181

3,994

4,173

3,883

3,741

3,978

Less tobacco tax

-1,497

-2,052

-2,219

-1,998

-1,902

-2,003

Sales

1,684

1,942

1,954

1,885

1,839

1,975

Cost of goods sold

-807

-968

-959

-881

-894

-992

Gross profit

877

974

995

1,004

945

983

Sales and administration

costs, etc.

-548

-571

-540

-622

-596

-640

Shares of earnings in

associated companies

5

4

5

3

3

3

 

334

407

460

385

352

346

Item affecting

comparability

-

-

-

-

-

-48

Operating profit

334

407

460

385

352

298

             
Net interest expense

-3

-4

-6

-4

-4

-13

Other financial items, net

21

3

-17

-18

-7

-6

Risk exposure          

-60

Net financial items

18

-1

-23

-22

-11

-79

Profit after financial

items

352

406

437

363

341

219

Income taxes

-116

-110

-155

-131

-111

-95

Minority interests

-2

-2

2

1

0

2

Net profit

234

294

284

233

230

126

 

Sales by Division

SEK M

Q1/97

Q2/97

Q3/97

Q4/97

Full year
1997

Q1/98

Q2/98

Chewing Tobacco

295

261

312

281

1,149

267

265

Cigarettes

349

430

414

353

1,546

328

362

Cigars

151

186

161

193

691

187

225

Lighters

211

226

210

187

834

196

184

Matches

303

349

297

350

1,299

324

343

Pipe Tobacco

37

41

44

44

166

48

57

Snuff

238

267

281

293

1,079

295

330

Group-wide operations

and eliminations

100

182

235

184

701

194

209

Total

1,684

1,942

1,954

1,885

7,465

1,839

1,975

 

Operating Profit by Division

SEK M

Q1/97

Q2/97

Q3/97

Q4/97

Full year
1997

Q1/98

Q2/98

Chewing Tobacco

104

93

123

100

420

86

94

Cigarettes

94

144

175

124

537

92

92

Cigars

30

27

39

35

131

31

32

Lighters

10

13

16

14

53

14

3

Matches

26

43

40

38

147

30

35

Pipe Tobacco

5

9

9

5

28

12

9

Snuff

115

117

138

152

522

149

152

Group-wide operations

and eliminations

-50

-39

-80

-83

-252

-62

-71

Item affecting

comparability

           

-48

Total

334

407

460

385

1,586

352

298

 

Key Data and Data per Share, pro forma

In view of the share redemption program, the Group’s key data has been calculated pro forma in the table below. In the calculation, the redemption amount has been treated as paid in the beginning of the period.

 

Result, rolling 12-mths
through June 30, 1998

Adjustments

Pro forma,
rolling 12-months

Number of shares

463,558,252

-32,218,589

431,339,663

Income per share, SEK

1.83 *)

 

1.93

Shareholders’ equity per shares, SEK

5.87 *)

 

3.80

Equity/assets ratio, %

36.6

 

22.0

Return on shareholders equity, %

33.1

 

56.0

* Since the redemption price per share exceeds the share price, rolling-12-month income per share and shareholders’ equity through June 30, 1998 have been adjusted to facilitate comparisons with income per share and shareholders’ equity per share prior to redemption. Without the adjustments, income per share and shareholders’ equity per share during the 12-month period under review amounted to SEK 1.88 and SEK 6.01, respectively.

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Swedish Match AB
SE-118 85 Stockholm

Phone +46 10 13 93 000
Corporate reg no. 556015-0756

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