Interim Report January - September 1998
Januari – September 1998
- Consolidated sales rose to SEK 6,037 M (5,580).
- Operating profit amounted to SEK 1,045 M (1,201).
- Net profit amounted to SEK 578 M (812).
Compared with the year –earlier period, Swedish Match sales during the first nine months of 1998 rose 8% to SEK 6,037M(5,580). SEK 390 M of the sales increase a attributable to acquitions, mainly within the Match Division.
Sales of Cigarette Division rose 10% during the third quarter compared with the second quarter of 1998. The increase was due largely to increased cigarette sales in Sweden after the tax reduction on August 1, 1998.
The Snuff Division reported continued strong growth in Sweden and the U.S. Operating profit declined due to lower volumes in the Swedish market.
Operating income declined to SEK 1,045 M (1,201), including an item affecting comparability amounting to SEK 48 M. The Group´s operating income in the third quarter improved significantly compared with the two first quarters of the year.
Summary of Consolidated Income Statement
|SEK M||First nine months|
|Income after financial items||894||1,195|
Sales by Division
|First nine months||Percent||12 months ended||Full year|
|SEK M||1998||1997||change||Sept 1998||1997|
|Koncerngemensamt och elimineringar *||664||517||28||848||701|
* After May 1, 1997, external invoicing of Prince cigarettes is reported under Group-wide operations. Subcontracted production remains within the Cigarette Division. The change means that of total sales of Prince during the January–September 1998 period, which amounted to SEK 324 M, SEK 119 M was reported in the Cigarette Division and SEK 205 M in Group-wide operations.
Operating Income by Division
|First nine months||Percent||12 months||Full year|
|SEK M||1998||1997||change||Sept 30, 1998||1997|
|Koncerngemensamt och elimineringar *||-199||-169||-282||-252|
* Most of the contribution from sales of Prince cigarettes is reported under the Cigarette Divison.
The Chewing Tobacco Division operates solely in the North American market, primarily in the U.S.
Sales amounted to SEK 812 M (868), a decline of 6% compared with the year-earlier period. Expressed in local currency, sales were down 11%. The decline in sales was due primarily to total market decline and somewhat lower market shares. The market was characterized by intensified price pressure. A new product in the low-price segment was launched during the period in response to competition.
Operating income amounted to SEK 253 M (320), down 21%. Expressed in local currency, the decline was 24%. The decline was due mainly to lower volumes.
The Swedish market accounts for 75% of sales invoiced by the Cigarette 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 period amounted to SEK 1,091 M, a decline of SEK 102 M, or 9%, compared with the year-earlier period.
Operating income was down 21% to SEK 326 M (413). Lower sales, the Prince agreement and costs for the re-launch of Blend cigarettes affected operating income adversely while production rationalization measures had favorable effects.
Sales and operating income improved significantly during the third quarter. Volumes rose after the tax reduction on August 1, concurrent with lower market costs during the period.
During 1997, the tobacco tax in Sweden was increased 63%. This caused a sharp increase in illegal trade. Legal cigarette sales in Sweden fell by about 25% during the first half of 1998 to approximately 2.5 billion cigarettes compared with the corresponding period in 1997. As a consequence of the increased illegal trade, the Swedish Parliament decided to reduce tobacco tax as of August 1, 1998 by about 30% at current prevailing prices (refer to "Reduction of tobacco tax in Sweden"). During the third quarter of 1998, legal sales in Sweden were about 1.6 billion cigarettes, compared with 1.3 billion in the second quarter. Swedish Match’s market share was slightly lower during the third quarter. It is still too early to see the long-term effect of the tax reduction on volumes.
The Cigar Division is one of the world’s largest manufacturers of cigars and cigarillos. Western Europe is the Division’s most important market.
Sales during the period totaled SEK 642 M (498), an increase of 29%. Two new operating units have been consolidated in 1998: cigar operations in Finland and Swedish Match Australia Pty. These operations contributed sales of SEK 88 M during the period. Increased marketing efforts contributed to increased sales in all markets, except for North America.
Operating income amounted to SEK 94 M (96). Increased marketing costs especially in North America affected income.
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 amounted to SEK 557 M (647), down 14%. Volumes were down in Southeast Asia and Russia as a consequence of the financial instability in these markets.
Operating income was SEK 14 M (39).
The Match Division is the world’s only global manufacturer of matches. Sales are concentrated in Europe, South America and Asia, although large export volumes are sold to approximately 100 other countries. The Division also manufactures match production equipment through Swedish Match Arenco.
Sales rose 20% to SEK 1,140 M (949). SEK 190 M of the sales increase was attributable to consolidation of new units.
During the period, additional shares in PLAM Bulgarski Kibrit JSCO were acquired, bringing Swedish Match’s holding to slightly more than 90%.
Swedish Match Kav, the Turkish match company, was consolidated from May 1998.
Additional shares were acquired in the two investment companies in Singapore that own 39% of all shares outstanding in Wimco Ltd. of India. Accordingly, the ownership share in the investment company amounts to 94%. Since Swedish Match has controlling influence in Wimco, the company was consolidated from April 1, 1998.
Operating income amounted to SEK 94 M (109), a decline of 14%. Lower match volumes particularly in Europe contributed to the earnings decline. Acquired units affected earnings marginally.
Swedish Match is discontinuing production of advertising matches in the plant at Geraardsbergen, Belgium. Production is being transferred to the factory in Szeged, Hungary. Total costs of the transfer are estimated at SEK 48 M.
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 31% to SEK 160 M (122).
Operating income improved by SEK 5 M to SEK 28 M. The takeover of rights to market Borkum Riff in the U.S. had a favorable impact on the Division’s sales and operating income.
The Snuff Division’s largest markets are Sweden (incl. duty-free sales) and the U.S.
Sales amounted to SEK 971 M (786), an increase of 24% over sales in the year-earlier period.
Swedish Match’s share of the U.S. market continued to increase. Volume-wise, sales in the U.S. rose 72% and 5% in Sweden (including tax-free), compared with the corresponding period in 1997.
Operating income improved by 31% to SEK 483 M (370) on the strength of higher volumes in Sweden (including duty-free) and the U.S., as well as a change in product mix. Operating income in the third quarter was SEK 182 M. A new product, Mini Catch Dry, was launched in Sweden during the period.
Net expenses for Group-wide activities increased to SEK 199 M (169), which includes sponsorship costs for participation in the Whitbread Round the World Race and costs for an internal project conducted worldwide. The sponsor agreement was concluded during the third quarter of 1998.
Swedish Match established wholly owned operations in Australia during the nine-month period 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 these 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. The acquisition is expected to increase Group sales by about SEK 50 M annually.
Net interest expense during the first nine months of 1998 totaled SEK 56 M (expense: 13). Net interest expenses increased due to higher debts related to redemption of shares. Other financial items, a net expense of SEK 35 M (income: 7), are attributable primarily to costs of SEK 14 M incurred for the redemption program as well as exchange rate movements. 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
Group investments during the first nine months of 1998 amounted to SEK 358 M (194). Depreciation according to plan totaled SEK 245 M (202). Cash and bank balances, including short-term investments, totaled SEK 1,150 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 2,082 M, an increase of SEK 1,611 M since December 1997.
Average Number of Group
The average number of Group employees during the first nine months of 1998 was 9,199, of which 2,083 in Wimco, compared with 6,337 in the corresponding period of 1997. The average number of employees in Sweden was 1,456, compared with 1,408 a year earlier.
During the past 12-month period, total tobacco tax and value-added tax for cigarettes and other tobacco products paid by Swedish Match in Sweden amounted to SEK 9,453 M (9,555).
Reduction of tobacco tax in
The Swedish Parliament resolved to reduce the tobacco tax imposed on cigarettes in Sweden, effective August 1, 1998. As a result of the reduction, the unit price per cigarette has been reduced from SEK 0.85 to SEK 0.20, while that portion of taxes related to the retail price has been raised from 17.8% to 39.2%. Swedish Match has adjusted 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|
(highest fixed price)
On July 7, 1998, a Special Meeting of Shareholders in 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 at the end of July to shareholders who had applied for redemption. The Special Meeting of Shareholders 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.
New President and CEO of
The current President and CEO of Swedish Match, Göran Lindén, earlier this year notified the company’s Board of Directors that he wishes to be released from operational responsibility for the company not later than the Annual General Meeting in 1999. Against this background, on August 10, 1998, the Board appointed Lennart Sundén as the new President and CEO, effective November 1, 1998.
Efforts to increase the efficiency of Group production plants have been intensified during the year. Decisions on additional rationalization measures are expected by the end of 1998. As earlier announced, costs for this restructuring are estimated at approximately SEK 100 M. Savings from the rationalization program will yield favorable effects on income during the coming year.
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.
Significant events after the
end of the reporting period
The wholesale price for the moist snuff, Timber Wolf in the US will increase by 10 cents to USD 1 per can, effective from end October 1998.
This report has not been reviewed by the company’s auditors.
The year-end report on 1998 operations will be published on February 12, 1999.
President and Chief Executive Officer
Consolidated Income Statement in summary
|SEK M||First nine months||Percent||12 months ended||Full year|
|Sales, incl. tobacco tax||11,874||11,348||5||15,757||15,231|
|Less tobacco tax||-5,837||-5,768||-1||-7,835||-7,766|
|Cost of goods sold||-3,048||-2,734||-11||-3,929||-3,615|
|Sales and administration costs, etc||-1,905||-1,659||-15||-2,527||-2,281|
|Share in earnings of associated companies||9||14||-36||12||17|
|Item affecting comparability *||-48||-||-||-48||-|
|Net interest expense||-56||-13||-60||-17|
|Other financial items, net||-35||7||-53||-11|
|Item affecting comparability **||-60||-||-60||-|
|Net financial items||-151||-6||-173||-28|
|Income after financial items and minority interests||894||1,195||-25||1,257||1,558|
|Net income for the period||578||812||-29||811||1,045|
* Tranfer of production from Geraardsbergen, Belgium
** Risk exposure in Asia.
Consolidated Balance Sheet in summary
|SEK M||Sept 30, 1998||Dec 31,1997|
|Intangible fixed assets||964||757|
|Tangible fixed assets||2,622||2,226|
|Financial fixed assets||307||308|
|Current operating assets||3,378||3,125|
|Current financial receivables||170||153|
|Cash and bank||1,150||563|
|Other long-term liabilities||93||27|
|Other current liabilities||249||290|
|Current operating liabilities||2,211||2,133|
|Total equity, provisions and liabilities||8,591||7,132|
|12 month ended Sept 30, 1998||Full year 1997||Full year 1996|
|Operating margin, %*||18,7||21.2||23,2|
|Return on operating capital, %*||35,0||42.7||49,9|
|Return on shareholders' equity, %||35,4||39.5||57,3|
|Interest coverage ratio, times||10,8||24.9||9,6|
|Debt/equity ratio, %||99,6||15.7||3,2|
|Equity/assets ratio, %||24,3||41.9||34,4|
|Investments, SEK M||705||541||218|
|Average number of employees||9,199 **||6,467||6,580|
|Share data ***|
|Income per share after full tax, SEK|
after items affecting comparability
Shareholders’ equity per share, SEK
|Number of shares outstanding at end of period||431,339,663||463,558,252||463,558,252|
* Before items affecting comparability
** First nine months 1998
*** In certain cases adjusted for the bonus issue component in the redemption of shares. The average number of shares for the period October 1, 1997 through September 30, 1998 was 458,188,487. For full-year 1997 and 1996, the average number of shares was 463,558,252.
|Sales, incl. tobacco tax||3,994||4,173||3,883||3,741||3,978||4,155|
|Less tobacco tax||-2,052||-2,219||-1,998||-1,902||-2,003||-1,932|
|Cost of goods sold||-968||-959||-881||-894||-992||-1,162|
|Sales and administration costs, etc.||-571||-540||-622||-596||-640||-669|
|Shares in earnings of associated companies||4||5||3||3||3||3|
|Item affecting comparability||-||-||-||-||-48|
|Net interest expense||-4||-6||-4||-4||-13||-39|
|Other financial items, net||3||-17||-18||-7||-6||-22|
|Item affecting comparability||-60||-|
|Net financial items||-1||-23||-22||-11||-79||-61|
|Income after financial items||406||437||363||341||219||334|
Sales by Division
|SEK M||Q1/97||Q2/97||Q3/97||Q4/97||Full year 1997||Q1/98||Q2/98||Q3/98|
|Group-wide operations and eliminations||100||182||235||184||701||194||209||261|
Operating Income by Division
|SEK M||Q1/97||Q2/97||Q3/97||Q4/97||Full year 1997||Q1/98||Q2/98||Q3/98|
|Group-wide operations and eliminations||-50||-39||-80||-83||-252||-62||-71||-66|
|Item affecting comparability||-48||-|