Outlook and risk factors
Full Year 2021 Outlook
Swedish Match expects that the trend of increased interest from consumers, industry participants and regulators in less harmful alternatives to cigarettes will continue. Our ambition is to create value for both shareholders and society by providing products that are recognized as safer alternatives to cigarettes.
For 2021, Swedish Match expects continued market growth for smokefree products, most notably driven by rapid growth of nicotine pouches. Swedish Match expects that the attractive prospects of the nicotine pouch category will further elevate competitive activity.
During 2021, Swedish Match expects to increase its investments in marketing, distribution and sales efforts in both existing and new markets to actively participate in growth opportunities. Continued capital investments by Swedish Match to further expand nicotine pouch production capacity are expected to result in capital expenditures in 2021 above the 2020 level.
While Swedish Match expects that the COVID-19 pandemic will remain a serious public health issue for a large part of 2021, Swedish Match expects its business to remain largely resilient to material negative COVID-19 related effects.
At least for the first half of 2021, Swedish Match expects a significant negative currency translation effect to affect the sales and earnings comparisons versus 2020.
The effective underlying corporate tax rate in 2021, excluding associated companies, is expected to be around 23 percent.
The Company remains committed to returning cash not needed in operations to shareholders.
Effects from the coronavirus (COVID-19)
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, acknowledging the global scale of the impact of COVID-19 on people’s health, families and communities. While longer-term effects from the pandemic are uncertain, the negative commercial, operational and financial consequences to Swedish Match have thus far been limited. On the contrary, Swedish Match estimates that, thus far and for the full year 2020, COVID-19 related changes to consumer demand and purchase patterns have contributed to increased sales for several of its businesses. For cigars, while consumer demand is estimated to have been elevated due to COVID-19, resulting in particularly strong Swedish Match volume development for HTL cigars, COVID-19 related production constraints have limited Swedish Match’s ability to fully meet the demand for natural leaf varieties. Swedish Match is closely monitoring the current situation including governmental guidelines and advice from public health authorities in every country where we operate. We are proactively taking the steps that we believe are appropriate to mitigate potential impacts to our employees, our customers and our business, as well as to society. To date, other than the governmentally imposed deferral by the US of certain tax payments in the second quarter, which were paid during the third quarter, no material governmental subsidies or concessions related to COVID-19 have been sought or received by Swedish Match.
Financial position and liquidity
In February 2020, Swedish Match issued a seven-year 300 MEUR bond (3,175 MSEK) at a fixed annual coupon of 87.5 bps. At the end of 2020, we held 3,411 MSEK in cash and cash equivalents, and a net debt position of 13,523 MSEK corresponding to a leverage of 1.9 in relation to full year 2020 EBITA. During the year, an ordinary dividend for the financial year 2019 of 2,020 MSEK was paid out to shareholders on April 9. Ahead of the dividend payment, management performed extensive liquidity stress testing, reconfirming our financial strength.
Management has reviewed significant assumptions and other facts and circumstances having an implication on the reported balances in accordance with IFRS. At this point, there are no indications that the COVID-19 pandemic will affect the long-term performance of the business such that valuation of company assets is significantly impacted.
Credit risks are regularly reviewed, with no indications of any significant changes in customers’ credit terms or to customers’ ability to pay outstanding invoices when they fall due.
Financial assets in several countries, particularly debt and equity securities, have been impacted by the uncertainty surrounding COVID-19 leading to valuation volatility. Some of the Group’s post-employment benefit plans hold equities, whose growth is expected to outpace liabilities over the long term while providing volatility and risk in the short term. During the last nine months of 2020, pension assets have recovered the losses that were experienced in the first quarter of 2020. Updated actuarial assumptions at year end used in the measurement of our defined post-employment benefit obligations have led to declines in discount rates, which have increased the reported value of the Group’s defined post-employment benefit obligations. As at December 31, 2020 the Group’s net defined post-employment benefit obligations increased by 51 MSEK compared to December 2019, mainly as a result of negative remeasurement effects from lower discount rates, which were partly offset by returns on plan assets. Upon consolidation, the reported Group net post-employment liability was also impacted by positive currency translation effects mainly due to the weaker US dollar versus the Swedish krona.
The Group’s derivatives and deposits are with banks backed by sound ratings. The credit risk of financial counterparties is monitored daily. Management has further assessed that there is no change in the underlying risk affecting the classification of financial instruments reported in the balance sheet.
Swedish Match faces intense competition in all of its markets and for each of its products and such competition may increase in the future. To remain successful, the Group must develop products and brands that resonate with changing consumer trends, and price and promote its brands competitively. Restrictions on advertising and promotion may, however, make it more difficult to counteract any loss of consumer loyalty. Competitors may develop and promote new products which could be successful, and could thereby have an adverse effect on Swedish Match results of operations.
Swedish Match has substantial sales in the US, with products sourced from local US production facilities and imports from Swedish Match’s production facilities in the Dominican Republic and in Sweden. Swedish Match also has operations in Brazil, Denmark, Norway, the Philippines and EMU member countries. Consequently, changes in import duties as well as in exchange rates of the euro, Norwegian krone, Danish krone, Brazilian real, the Dominican peso and in particular the US dollar may adversely affect the Group’s results of operations, cash flow, financial condition or relative price competitiveness in the future. Such effects may occur both in local currencies and when such local currencies are translated into Swedish currency for purposes of financial reporting.
Regulatory developments and fiscal changes related to tobacco and other nicotine products, corporate income and other taxes, as well as to the marketing, sale and consumption of tobacco products and other products containing nicotine in the countries where the Group is operating may have an adverse effect on Swedish Match results of operations.
For a further description of risk factors affecting Swedish Match, see the Risk and risk management section in the Report of the Board of Directors in the published Swedish Match annual report for 2020.
Source: Swedish Match Full Year Report 2020.