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.
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)
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, similar to the full year 2020, COVID-19 related changes to consumer demand and purchases have contributed to increased sales for several of its businesses. For cigars, while strong consumer demand is estimated to have been further elevated due to COVID-19, related production constraints have continued to limit Swedish Match’s ability to fully meet the demand for natural leaf varieties during the first six months of 2021. For the Smokefree product segment, sales and operating profit during the first six months of 2021 have benefitted from channel mix effects that have been brought on by COVID-19 restrictions related to travel.
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.
Financial position and liquidity
Swedish Match has a good financial position with strong cash flow from operating activities and a solid credit rating which enable continued investments and pursuit of growth expansion possibilities. Swedish Match continually work to optimize its capital structure with due consideration to flexibility and stability requirements. The Board has adopted certain financial guidelines to ensure that liquidity and refinancing risk are manageable. For details regarding Swedish Match financial position and liquidity, refer to Cash flow and financing and for details regarding the basis for determining shareholder distributions refer to Objectives, policies and processes for managing capital in the Swedish Match Half Year Report January - June 2021.
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. In the beginning of 2020, the Group’s pension assets experienced losses due to the COVID-19 outbreak, which recovered during the remainder of 2020. Updated actuarial assumptions at June 30, 2021 used in the measurement of our defined post-employment benefit have decreased the reported value of the Group’s defined post-employment benefit obligations by 263 MSEK compared to December 2020, mainly as a result of positive remeasurement effects from higher discount rates and higher return on plan assets. Upon consolidation, the reported Group net post-employment liability was also impacted by negative currency translation effects relative to December 2020 mainly due to the stronger 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. For more information on the reported balances see Note 3 – Carrying value and fair value of financial assets and liabilities in the Swedish Match Half Year Report January - June 2021.
No material governmental subsidies or concessions related to COVID-19 have been sought or received by Swedish Match during the first six months of 2021.
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 financial results.
For a further description of risk factors affecting Swedish Match, see the Effects from COVID-19 above as well as 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 Half Year Report January - June 2021.