CEO comment Full Year 2016

A year of solid growth

I am pleased to report another year of solid growth in 2016, with higher sales in all our product areas and strong operating profit growth.

This has been an eventful and exciting year, with promising developments for innovative smokeless products both in Scandinavia and in markets outside of Scandinavia, a record performance for our cigar business in the US, and the successful IPO and subsequent reduction in ownership of Scandinavia Tobacco Group.

Along with our successes there have also been some challenges. This past year we have worked in an environment of stiff competition and notable regulatory changes. We anticipated many of these changes, and I firmly believe that we are prepared and ready to face any challenge from those changes from a position of strength. We have also taken major strides in continuing on our path toward our vision and strategic direction of a world without cigarettes. And, once again, we have delivered solid cash returns to our shareholders. I would like to highlight a number of activities which will help to enable us to expand and grow in the product area Snus and moist snuff.

In the US, our efforts to grow and develop our snus business have begun to deliver tangible results. With increased volumes and higher sales of our General snus, we have noted a clear trend of improving gross profit and reduced losses. The US snus market is growing and Swedish Match volumes grew at double digit levels. We have expanded our offering of innovative products with the new nicotine pouches without tobacco assortment, ZYN, a product range that has been very well received, first in Colorado, and then through expanded distribution in the western US. With regard to our application for Modified Risk Tobacco Product classification to the FDA, we have been asked to meet with the FDA to further discuss our application and determine our next steps in the process toward an eventual MRTP decision. We continue to believe that our application has strong merit and look forward to fruitful dialog.

In Scandinavia, the market for snus is dynamic and competitive activity is fierce. Even here, we have seen positive developments. In the Swedish snus market our efforts toward a more stable volume for our premium snus brands continued to be supported by our modern XRANGE series, and we have also seen a clear slowdown in the market mix shift toward lower priced products. Still, with a slowdown in the market growth at the latter part of the year, and with some continued mix shift toward value products, challenges remained in defending our market share. In Norway, our share declines slowed during the latter part of the year, driven by success of our modern G.3 range within the General brand. In both reported and local currency terms, our sales and operating profit for the Snus and moist snuff product area grew, with slight improvements for snus in Scandinavia and moist snuff in the US coupled with reduced operating loss for our growth efforts with snus and nicotine pouch products outside Scandinavia.

During 2016 the new European Tobacco Products Directive (TPD), came into force, bringing new challenges to the tobacco industry. For Swedish Match, this has meant changes in labelling and new reporting requirements in Sweden. In Norway, standardized packaging was approved by the government, which is likely to be implemented during 2018. We continue to seek out new opportunities in Europe, consistent with the scope of TPD. At the same time, we are challenging parts of the TPD through the courts, with a case filed in the UK regarding the EU ban on snus, now having been referred to the European Court of Justice.

Within Other tobacco products (cigars and chewing tobacco) we had another outstanding year for cigars, in terms of volume growth and growth in sales and operating profit in local currency. Our US cigar volumes once again reached record levels, surpassing record volumes in both 2015 and 2014. We continued to experience rapid growth in the growing natural leaf cigar segment, and we also experienced growth in the homogenized tobacco leaf cigar segment. For US chewing tobacco, we faced a more challenging market. Chewing tobacco volumes for Swedish Match brands declined markedly, and we have also noted a shift toward more value priced products. New taxes toward the end of the year, most notably in Pennsylvania, have exacerbated the market difficulties in this product segment.

The US Food and Drug Administration enacted its deeming regulations for cigars. There are new reporting and regulatory requirements, as well as work involved in substantial equivalents applications, all of which entail costs. While the new regulations, which notably address all products launched since 2007, and all new ­products proposed after August 2016, will complicate our work, the tasks involved are manageable, and we are confident that we will be successful in this new environment.

Our Lights business demonstrated resilience, and 2016 reported growth for both operating profit and overall profitability. Lighters in particular had a very solid performance, and we have continued our strict discipline on costs for both matches and lighters.

We successfully listed Scandinavian Tobacco Group on the Nasdaq Copenhagen stock exchange in February, and subsequently sold a significant portion of our shareholding. With proceeds from the Scandinavian Tobacco Group transactions returned to our shareholders through special dividends, combined with our regular dividends and share repurchase and cancellation program, substantial cash and shareholder value was delivered to our shareholders.

Sustainability work for Swedish Match is concentrated in those areas which are most important for the Company and our stakeholders. This past year, significant strides have been taken in further refining and focusing our efforts to those areas where we can really make a difference. Last year, the Group Management Team held several sessions with a focus on sustainability issues. During the year, we continued to stress to employees the importance of understanding and adhering to our Code of Conduct (available on our website) with communication and training throughout the organization. The Code of Conduct defines our standards across several sustainability related topics. We also made good progress in other specific areas like energy saving projects and responsible leaf tobacco purchasing.

Our financial performance during 2016 recorded growth in sales and in operating profit. EPS for the year increased to 27.38 SEK (14.48). Excluding share of net profit in Scandinavian Tobacco Group and adjusted for the larger one-time items in both years EPS increased by 13 percent to 14.39 SEK (12.79). For 2016, the proposed ordinary dividend is 8.50 SEK per share and the Board of Directors will also propose a special dividend of 7.50 SEK per share at the Annual General Meeting following the sale of shares in STG in January 2017.

I am grateful for our strong and positive relationships with our customers, our consumers, and our employees, for helping us to deliver a strong and solid business. Over the coming years, we will continue to face challenges and changes in our markets as well as on the regulatory front. We look forward to facing these challenges, adapting and innovating, to allow continued benefits to you, our shareholders.

Stockholm, March, 2017

Lars Dahlgren
President and CEO


Source: Swedish Match Annual Report 2016.