CEO comment Full Year 2017

A year of solid growth

2017 has been a year marked by growth in both sales and operating profit from product areas – a year which has demonstrated the benefits of our strategy and our approach.

With a vision of a world without cigarettes, the combination of maintaining our standards of quality and tradition, while capitalizing on market opportunities through innovation, provides Swedish Match with a firm foundation for future growth opportunities.

Investments that we have made within our consumer insights and R&D functions have strengthened our portfolio of smokeless offerings, and we have supplemented organic efforts through acquisitions. We believe that the best alternatives to cigarettes lie in smokeless products – with and without tobacco. By providing men and women with a choice of highly innovative offerings that meet their changing needs and continuing to satisfy our product loyal consumer base with traditional high quality products, we are able to successfully compete and grow.

We are seeing the fruits of our efforts that we have made over recent years – from research and development, well nurtured brands, new technologies, and our strategic choices in line with our vision. The success of G.3 in Norway, XR in Sweden, and our newest efforts with chew bags – chewing tobacco in convenient pouches, and ZYN – nicotine pouches without tobacco – are examples of some of our growth drivers in the smokeless arena.

In Scandinavia, the snus market has been dynamic on a number of fronts. In Sweden, competitive activity remains fierce with new product launches, new varieties, and packaging changes within each product segment. At the same time, however, we noted more stability in pricing within each product segment. Upward price adjustments were made, not only by Swedish Match, but for many competitive products as well. The premium segment has held its share of the overall market, in large part due to the growth of innovative product offerings, including XR and One – modern snus variants with attractive pricing. In Norway, our dedicated efforts drove a change in our market share performance compared to prior years. Growth from our G.3 range significantly outpaced the market in 2017, and our share of the total market has been much more stable than before.

At Swedish Match we understand and willingly accept the responsibility that comes with selling products intended for adult consumers only. Far too often, however, we are faced with increased regulation based on ideology rather than science. The regulations themselves are at times both arbitrary and discriminatory. We will not and must not passively capitulate to regulations that we believe elevate ideology over societal health. Norway, for example, has passed plain packaging regulations that seemingly ignore the underlying comparable health risks of cigarettes versus snus. We challenged this regulation through the Norwegian courts, but have lost in two instances. In January 2018, the legality of the snus ban within the EU was once again heard by the European Court of Justice, and we anticipate that it will be several months before the court reaches a final verdict. We would like to believe that justice will prevail and that we will see the removal of this disproportionate and discriminatory ban that limits informed choice by European consumers.

In the growing US snus market, our volumes were up, gross profit was higher, and operating losses improved. For moist snuff, while the overall market demonstrated modest volume growth, the pricing environment has improved, and both the pouch segment and the bulk pack segment (tubs) continued to markedly outpace the overall category. Within our own portfolio, we have been gaining share with our moist snuff pouches, and grew volumes with tubs, while we continued to face intense competitive pressure for our more traditional standard pack loose varieties. One of the most exciting developments in the US smokeless market has been the very positive reception for ZYN, our line of nicotine pouch products without tobacco. Volume growth has been impressive. Not only have we expanded our distribution in the western US, but also have experienced growth through faster turnover in existing stores. We are investing more behind ZYN, as we see significant opportunities with these types of innovative products. We are currently building new capacity in the US in our Owensboro, Kentucky facility, investing more than 60 million dollars, to enable us to produce locally to support the growth of ZYN. Products like snus and ZYN also bring dramatic health benefits compared with cigarettes.

We view the US FDA as an increasingly strong advocate for the concepts of harm reduction and continuum of risk, enabling informed smokers to transition toward products that are less harmful than cigarettes. Our snus products clearly fit this profile, supported by extensive and long duration research and scientific data.

Within Other tobacco products, the cigar market remained dynamic, with good growth and strong competition in both the natural leaf and HTL segments. We had another outstanding year for cigars, with record volumes, higher sales, and higher operating profit in local currency. The operating performance for cigars was even stronger than our reported numbers show when considering that FDA user fees were in place for all of 2017 but only for the last quarter of 2016. For US chewing tobacco, the market continued its long term decline (down 7 percent), and we have seen a notable shift in both the market and our own portfolio toward value priced products. We are, however, encouraged by the fact that our market share development in both the premium and value segments improved during 2017. Also during 2017, we acquired V2 Tobacco, providing us with greater scale and a stronger position for chew bags, which are both more convenient and easier to use than many other chewing products. The V2 Tobacco acquisition provides us with state of the art production from our plant in Denmark, and further enhances our growth opportunities.

Our Lights product area faced challenges, with volume declines for both lighters and matches. Sales for matches increased, however, due to pricing, mix, and positive currency effects – and the sales performance for complementary products was strong. Overall, still, we registered declines in both sales and operating profit for Lights. However, we see opportunities to grow our business in several markets. In China, for example, the Cricket lighter brand is now sold in over 30,000 stores on the mainland. We have also implemented a number of successful supply chain initiatives.

Sustainability work for Swedish Match is concentrated in those areas which are most important for the Company, our stakeholders, and society as a whole. This past year we have made significant strides in further refining and focusing our efforts to those areas where we can truly make a difference. We have been highly engaged and have made good progress, and I hope that you spend some time reading more about our efforts in the sustainability section of our annual report.

With a solid operational performance, and having sold our remaining shareholding in Scandinavian Tobacco Group (STG), we are delivering healthy returns to our shareholders with dividends and share repurchases. The Board recently proposed that the proceeds from the final sale of our shares in STG be paid to shareholders as a special dividend. If approved by the Annual General Meeting, a total 6,682 MSEK will have been paid to shareholders as a result of our divestments of shares in STG.

I firmly believe in strong and positive relationships with our customers, our consumers, and our employees. Only with these strong relationships, and the passion and innovative spirit of our employees, in line with our core values, are we best able to deliver a growing and sustainable business. I look forward to further adaptation and innovation in the changing market, built on the strength of our traditional businesses to provide benefits to you, our shareholders.

Stockholm, March, 2018

Lars Dahlgren
President and CEO

Source: Swedish Match Annual Report 2017.