2018 – Making strides toward our vision
2018 was a successful year for Swedish Match with very healthy growth in sales and operating profit from product segments. While our base businesses in our two largest product segments performed well, our growth initiatives continued to demonstrate very promising developments, with exceptional momentum for ZYN in the US.
More and more, we see evidence of a trend where the global consumption of nicotine products is shifting away from traditional combustible cigarettes, and the best alternatives to cigarettes lie in smokeless products. While we continue to believe that the global regulatory stance towards smokeless products is disproportionate given the role that such products can play in harm reduction, we are encouraged to see positive regulatory developments in the smokeless arena and our strategy and focus position us well to compete in pursuit of our vision.
During the year, we made substantial investments in the long-term strength and geographical reach of the Group. Our ZYN factory expansion project in the US is progressing according to plan and we expect capacity to be gradually increased throughout 2019 with a planned national launch of ZYN in the US during the second quarter. The very strong demand that we have experienced for ZYN in the western region has prompted us to twice decide to scale up the investment in manufacturing capacity for ZYN. The opportunity for ZYN extends beyond the US and the product has now, apart from Sweden, also been launched on a small scale in Denmark and in the Czech Republic. In addition to investments in the business, we also made acquisitions during the year. Oliver Twist and Gotlandssnus are smokeless tobacco companies that are excellent complements to our product portfolio providing new dimensions to our offerings.
In terms of the Group’s financial performance during 2018, the Snus and moist snuff product segment had a strong year, with higher sales and operating profit, both as reported and in local currencies. Sales and operating profit grew in both Scandinavia and the US.
In Scandinavia, market growth was robust during the year, but our own volume growth however lagged overall market growth. We remain committed to actively competing in the attractive growing segments of the market while balancing operating efficiency and profit growth.
In Sweden, increased consumer interest, intense competitive activity, product innovation within the premium segment, and the exceptionally warm summer were drivers of the market growth in 2018. There was continued stability in terms of price segmentation with the premium segment’s share of the total market increasing somewhat – a dynamic that is generally favorable to Swedish Match in terms of market share development. However, our market share declined notably during the year, particularly during the second half. The structural decline in the loose segment, highly competitive activity within both the premium and value segment, and the shift in the market toward all-white nicotine pouch products were all drivers behind our market share loss. In the nicotine pouch segment, we have seen good growth for ZYN and will continue our efforts to increase this brand’s presence on the market.
In Norway, while it is still early to assess the longer-term category implications of the plain packaging legislation, we have not seen a notable impact on consumption volumes in the market. Our market share declined during the year in Norway, principally reflecting segment shifts in the market. The loose segment showed relatively steep declines and the all-white nicotine pouch segment continued to grow and now accounts for more than 11 percent of the total Norwegian market volumes according to Nielsen.
Sales and operating profit for US moist snuff grew during the year, both as reported and in local currency, as higher pricing more than offset the slight volume decline. We continue to focus on the faster growing segments in the market, and it is encouraging to see that we once again outperformed the market growth rate for the pouch segment.
After several years of investment behind snus and nicotine pouches without tobacco in the US, 2018 represents our first profitable year from these products in this market. Volume growth for ZYN was extraordinary, coming both from increased velocity per store and expanded distribution. Volumes also grew for General snus despite a significant reduction in marketing spending. As encouraged by the FDA, we refiled our Modified Risk Tobacco Product application for General snus during the fourth quarter and on February 6 of this year, TPSAC, the tobacco products scientific advisory panel to the FDA held a meeting to discuss the Swedish Match application. We are pleased with the balanced comments by the FDA and look forward to the Agency’s final decision.
Within Other tobacco products (cigars and chewing tobacco), cigars continued to perform well during the year, driven by growth in small natural leaf and rolled leaf cigars. Our growth was however constrained in the final months of the year due to the shortage of tobacco supplies for rolled leaf cigars, as well as a slow-down in overall category growth. The slow-down in category growth emanated predominantly from HTL (including HTL value) varieties, and Swedish Match is well positioned in the market with a skew towards the faster growing segments. The issue with procuring cigar wrapper for our rolled leaf portfolio is temporary but will persist until the new crop arrives, which is anticipated late in the Spring of 2019. As volume growth in our cigar business slowed during the year, it is encouraging to see that favorable price/mix developments within our portfolio supported the financial performance of this business, following the price increases taken in the first half of the year within the rolled leaf assortment of our portfolio.
US chewing tobacco had a good year with a slight increase in operating profit in local currency. We continued to successfully balance our portfolio in line with the market shift toward value products and outperformed market volume trends within all segments based on distributor shipments to retail. In Europe, the chew bag market continued to grow, and we expanded our presence in several markets. The acquisitions of V2 Tobacco in 2017 and Oliver Twist in 2018 with their chew bags and tobacco bits contributed positively to both Group sales and operating profit.
Our Lights business had a difficult year as nylon prices impacted the financial performance of lighters. Portfolio price/mix effects for matches were favorable, helping to offset the effects of somewhat lower volumes.
During the year, we distributed strong cash returns to our shareholders through dividends and share repurchases. We paid 2,911 MSEK in dividends consisting of both an ordinary dividend and a special dividend following the final sale of shares in STG. We also repurchased shares for 2,512 MSEK. At the upcoming Annual General Meeting, the Board of Directors will be proposing an ordinary dividend of 10.50 SEK.
I would like to take this opportunity to thank our customers and business partners, our consumers, our shareholders and other stakeholders, and especially our employees, for helping us to achieve another successful year.
Lars Dahlgren
President and CEO
Source: Swedish Match Annual Report 2018
