Interim Report
10/23/1998 9:49 AM EST
January - September 1998
Group sales rose to SEK 6,037 M (5,580).
Operating income declined to SEK 1,045 M (1,201).
Continued sharp increase in sales and operating income for snuff.
Net income totaled SEK 578 M (812).
Items affecting comparability charged against income amounted to SEK 108 M.
Summary of Consolidated Income Statement
SEK M First nine months
1998 1997
Sales 6,037 5,580
Operating income 1,045 1,201
Income after financial items 894 1,195
Net income 578 812
Compared with the year-earlier period, Swedish Match sales during the first
nine months of 1998 rose 8%, to SEK 6,037 M (5,580). SEK 390 M of the sales
increase is attributable to acquisitions, mainly within the Match Division.
Sales of the Cigarette Division rose 10% during the third quarter compared
with the second quarter of 1998. The increase was due largely to increased
cigarette sales in Sweden after the tax reduction on August 1, 1998.
The Snuff Division reported continued strong growth, in Sweden and the U.S.
Operating income declined to SEK 1,045 M (1,201), including an item affecting
comparability amounting to SEK 48 M. The Group's operating income in the third
quarter improved significantly compared with the two first quarters of the
year.
Sales by Division
SEK M 12 months
First nine Percent ended Full year
months
1998 1997 change Sept 30,98 1997
Chewing Tobacco 812 868 -6 1,093 1,149
Cigarettes* 1,091 1,193 -9 1,444 1,546
Cigars 642 498 29 835 691
Lighters 557 647 -14 744 834
Matches 1,140 949 20 1,490 1,299
Pipe Tobacco 160 122 31 204 166
Snuff 971 786 24 1,264 1,079
Group-wide 664 517 28 848 701
operations
and
eliminations*
Total 6,037 5,580 8 7,922 7,465
* After May 1, 1997, external invoicing of Prince cigarettes is reported under
Group-wide operations. Subcontracted production remains within the Cigarette
Division. The change means that of total sales of Prince during the January-
September 1998 period, which amounted to SEK 324 M, SEK 119 M was reported in
the Cigarette Division and SEK 205 M in Group-wide operations.
Operating Income by Division
SEK M 12 months
First nine Percent ended Full year
months
1998 1997 change Sept 30,98 1997
Chewing Tobacco 253 320 -21 353 420
Cigarettes * 326 413 -21 450 537
Cigars 94 96 -2 129 131
Lighters 14 39 -64 28 53
Matches 94 109 -14 132 147
Pipe Tobacco 28 23 22 33 28
Snuff 483 370 31 635 522
Group-wide -199 -169 - -282 -252
operations
and
eliminations *
Items affecting -48 - -48 -
Comparability
Total 1,045 1,201 -13 1,430 1,586
* Most of the contribution from sales of Prince cigarettes is reported under
the Cigarette Divison.
Chewing Tobacco
The Chewing Tobacco Division operates solely in the North American market,
primarily in the U.S.
Sales amounted to SEK 812 M (868), a decline of 6% compared with the year-
earlier period. Expressed in local currency, sales were down 11%. The decline
in sales was due primarily to total market decline and somewhat lower market
shares. The market was characterized by intensified price pressure. A new
product in the low-price segment was launched during the period in response to
competition.
Operating income amounted to SEK 253 M (320), down 21%. Expressed in local
currency, the decline was 24%. The decline was due mainly to lower volumes.
Cigarettes
The Swedish market accounts for 75% of sales invoiced by the Cigarette
Division. The Division also sells cigarettes in Estonia and duty-free outlets,
as well as filters and cigarette papers in the U.K.
Sales during the period amounted to SEK 1,091 M, a decline of SEK 102 M, or
9%, compared with the year-earlier period.
Operating income was down 21% to SEK 326 M (413). Lower sales, the Prince
agreement and costs for the re-launch of Blend cigarettes affected operating
income adversely while production rationalization measures had favorable
effects.
Sales and operating income improved significantly during the third quarter.
Volumes rose after the tax reduction on August 1, concurrent with lower market
costs during the period.
During 1997, the tobacco tax in Sweden was increased 63%. This caused a sharp
increase in illegal trade. Legal cigarette sales in Sweden fell by about 25%
during the first half of 1998 to approximately 2.5 billion cigarettes compared
with the corresponding period in 1997. As a consequence of the increased
illegal trade, the Swedish Parliament decided to reduce tobacco tax as of
August 1, 1998 by about 30% at current prevailing prices (refer to "Reduction
of tobacco tax in Sweden"). During the third quarter of 1998, legal sales in
Sweden were about 1.6 billion cigarettes, compared with 1.3 billion in the
second quarter. Swedish Match's market share was slightly lower during the
third quarter. It is still too early to see the long-term effect of the tax
reduction on volumes.
Cigars
The Cigar Division is one of the world's largest manufacturers of cigars and
cigarillos. Western Europe is the Division's most important market.
Sales during the period totaled SEK 642 M (498), an increase of 29%. Two new
operating units have been consolidated in 1998: cigar operations in Finland
and Swedish Match Australia Pty. These operations contributed sales of SEK 88
M during the period. Increased marketing efforts contributed to increased
sales in all markets, except for North America.
Operating income amounted to SEK 94 M (96). Increased marketing costs
especially in North America affected income.
Lighters
Swedish Match is the world's third largest manufacturer of disposable
lighters. The most important markets are Western Europe, Eastern Europe, the
U.S. and parts of Asia.
Sales amounted to SEK 557 M (647), down 14%. Volumes were down in Southeast
Asia and Russia as a consequence of the financial instability in these
markets.
Operating income was SEK 14 M (39).
Matches
The Match Division is the world's only global manufacturer of matches. Sales
are concentrated in Europe, South America and Asia, although large export
volumes are sold to approximately 100 other countries. The Division also
manufactures match production equipment through Swedish Match Arenco.
Sales rose 20% to SEK 1,140 M (949). SEK 190 M of the sales increase was
attributable to consolidation of new units.
During the period, additional shares in PLAM Bulgarski Kibrit JSCO were
acquired, bringing Swedish Match's holding to slightly more than 90%.
Swedish Match Kav, the Turkish match company, was consolidated from May 1998.
Additional shares were acquired in the two investment companies in Singapore
that own 39% of all shares outstanding in Wimco Ltd. of India. Accordingly,
the ownership share in the investment company amounts to 94%. Since Swedish
Match has controlling influence in Wimco, the company was consolidated from
April 1, 1998.
Operating income amounted to SEK 94 M (109), a decline of 14%. Lower match
volumes particularly in Europe contributed to the earnings decline. Acquired
units affected earnings marginally.
Swedish Match is discontinuing production of advertising matches in the plant
at Geraardsbergen, Belgium. Production is being transferred to the factory in
Szeged, Hungary. Total costs of the transfer are estimated at SEK 48 M.
Pipe Tobacco
The Pipe Tobacco Division is one of the world's largest manufacturers of pipe
tobacco. Principal markets for the Division are the U.S., Sweden and the rest
of Western Europe.
Sales rose 31% to SEK 160 M (122).
Operating income improved by SEK 5 M to SEK 28 M. The takeover of rights to
market Borkum Riff in the U.S. had a favorable impact on the Division's sales
and operating income.
Snuff
The Snuff Division's largest markets are Sweden (incl. duty-free sales) and
the U.S.
Sales amounted to SEK 971 M (786), an increase of 24% over sales in the year-
earlier period.
Swedish Match's share of the U.S. market continued to increase. Volume-wise,
sales in the U.S. rose 72% and 5% in Sweden (including tax-free), compared
with the corresponding period in 1997.
Operating income improved by 31% to SEK 483 M (370) on the strength of higher
volumes in Sweden (including duty-free) and the U.S., as well as a change in
product mix. Operating income in the third quarter was SEK 182 M. A new
product, Mini Catch Dry, was launched in Sweden during the period.
Group-wide operations
Net expenses for Group-wide activities increased to SEK 199 M (169), which
includes sponsorship costs for participation in the Whitbread Round the World
Race and costs for an internal project conducted worldwide. The sponsor
agreement was concluded during the third quarter of 1998.
Acquisitions
Swedish Match established wholly owned operations in Australia during the
nine-month period through Swedish Match Australia Pty. Limited. The company
has acquired an extensive, national distribution network for sales of tobacco
and tobacco-related products from the Alexander Group. Sales from these
operations in 1997 amounted to SEK 60 M.
Swedish Match has also acquired the match, lighters and fireplace matches
operations of Bryant & May, another Australian company. The acquisition
includes inventories, equipment, goodwill, trademarks and the Bryant & May
company name. The acquisition is expected to increase Group sales by about SEK
50 M annually.
Financial Results
Net interest expense during the first nine months of 1998 totaled SEK 56 M
(expense: 13). Net interest expenses increased due to higher debts related to
redemption of shares. Other financial items, a net expense of SEK 35 M
(income: 7), are attributable primarily to costs of SEK 14 M incurred for the
redemption program as well as exchange rate movements. In addition, a
provision was reported for risks totaling SEK 60 M to cover the Group's
financial exposure in Southeast Asia.
Investments, Financing and Liquidity
Group investments during the first nine months of 1998 amounted to SEK 358 M
(194). Depreciation according to plan totaled SEK 245 M (202). Cash and bank
balances, including short-term investments, totaled SEK 1,150 M at the close
of the period, compared with SEK 563 M at the beginning of 1998. Net debt at
the close of the period totaled SEK 2,082 M, an increase of SEK 1,611 M since
December 1997.
Average Number of Group Employees
The average number of Group employees during the first nine months of 1998 was
9,199, of which 2,083 in Wimco, compared with 6,337 in the corresponding
period of 1997. The average number of employees in Sweden was 1,456, compared
with 1,408 a year earlier.
Tobacco Tax
During the past 12-month period, total tobacco tax and value-added tax for
cigarettes and other tobacco products paid by Swedish Match in Sweden amounted
to SEK 9,453 M (9,555).
Reduction of tobacco tax in Sweden
The Swedish Parliament resolved to reduce the tobacco tax imposed on
cigarettes in Sweden, effective August 1, 1998. As a result of the reduction,
the unit price per cigarette has been reduced from SEK 0.85 to SEK 0.20, while
that portion of taxes related to the retail price has been raised from 17.8%
to 39.2%. Swedish Match has adjusted its prices at the same time. Price cuts
for major products are shown below.
Sale price Retail sales Sales and value Price paid by
Swedish Match margin added tax consumer
Before After Before After Before After Before After
8/1/98 8/1/98 8/1/98 8/1/98 8/1/98 8/1/98 8/1/98 8/1/98
Blend 5.28 5.17 5.40 4.91 33.82 24.42 44.50 34.50
Gul
Cigar
ettes
(high
est
fixed
price
)
Redemption
On July 7, 1998, a Special Meeting of Shareholders in Swedish Match resolved
to approve the redemption of 34,752,689 shares at a redemption price of SEK 35
per share. The total redemption amount, accordingly, is SEK 1,216 M, which was
transferred at the end of July to shareholders who had applied for redemption.
The Special Meeting of Shareholders also approved a bonus issue of shares to
be effected by increasing the par value of Swedish Match shares from SEK 2.00
to SEK 2.20. In conjunction with redemption, a special issue of new shares in
the amount of SEK 69.5 M was also effected. After the transactions reviewed
above, the total number of shares outstanding was 431,339,663.
New President and CEO of Swedish Match
The current President and CEO of Swedish Match, Göran Lindén, earlier this
year notified the company's Board of Directors that he wishes to be released
from operational responsibility for the company not later than the Annual
General Meeting in 1999. Against this background, on August 10, 1998, the
Board appointed Lennart Sundén as the new President and CEO, effective
November 1, 1998.
Outlook
Efforts to increase the efficiency of Group production plants have been
intensified during the year. Decisions on additional rationalization measures
are expected by the end of 1998. As earlier announced, costs for this
restructuring are estimated at approximately SEK 100 M. Savings from the
rationalization program will yield favorable effects on income during the
coming year.
Within the framework of its declared business strategies, Swedish Match also
plans to assume an active role in the search for suitable structural
transactions in the tobacco industry.
Significant events after the end of the reporting period
The wholesale price for the moist snuff, Timber Wolf in the US will increase
by 10 cents to USD 1 per can, effective from end October 1998.
Other information
This report has not been reviewed by the company's auditors.
The year-end report on 1998 operations will be published on February 12, 1999.
Göran Lindén
President and Chief Executive Officer
Consolidated Income Statement in summary
12 Full
SEK M First nine Percent months year
months ended
1998 1997 change Sept 1997
30,1998
Sales, incl. 11,874 11,348 5 15,757 15,231
tobacco tax
Less tobacco tax -5,837 -5,768 -1 -7,835 -7,766
Sales 6,037 5,580 8 7,922 7,465
Cost of goods sold -3,048 -2,734 -11 -3,929 -3,615
Gross income 2,989 2,846 5 3,993 3,850
Sales and -1,905 -1,659 -15 -2,527 -2,281
administration
costs, etc
Share in earnings 9 14 -36 12 17
of
associated
companies
1,093 1,201 -9 1,478 1,586
Item affecting -48 - - -48 -
comparability *
Operating income 1,045 1,201 -13 1,430 1,586
Net interest -56 -13 -60 -17
expense
Other financial -35 7 -53 -11
items, net
Item affecting -60 - -60 -
comparability **
Net financial items -151 -6 -173 -28
Income after 894 1,195 -25 1,257 1,558
financial items
Taxes -324 -381 - -455 -512
Minority interest 8 -2 9 -1
Net income for the 578 812 -29 811 1,045
period
* Tranfer of production from Geraardsbergen, Belgium
** Risk exposure in Asia.
Consolidated Balance Sheet in summary
SEK M Sept 30, Dec 31,1997
1998
Intangible fixed assets 964 757
Tangible fixed assets 2,622 2,226
Financial fixed assets 307 308
Current operating assets 3,378 3,125
Current financial receivables 170 153
Cash and bank 1,150 563
Total assets 8,591 7,132
Shareholders' equity 1,934 2,972
Minority interests 157 20
Provisions 715 656
Long-term loans 1,566 209
Other long-term liabilities 93 27
Short-term borrowings 1,666 825
Other current liabilities 249 290
Current operating liabilities 2,211 2,133
Total equity, provisions and 8,591 7,132
liabilities
Operating capital 4,753 3,975
Net debt 2,082 471
Key Data
12 month Full year Full year
ended 1997 1996
Sept 30, 1998
Operating margin, %* 18,7 21.2 23,2
Return on operating 35,0 42.7 49,9
capital, %*
Return on shareholders' 35,4 39.5 57,3
equity, %
Interest coverage ratio, 10,8 24.9 9,6
times
Debt/equity ratio, % 99,6 15.7 3,2
Equity/assets ratio, % 24,3 41.9 34,4
Investments, SEK M 705 541 218
Average number of 9,199 ** 6,467 6,580
employees
Share data ***
Income per share after
full tax, SEK
before items affecting 1.84 2.20 2.53
comparability 1.73 2.20 2.33
after items affecting 4.48 6.26 4.87
comparability
Shareholders' equity per
share, SEK
Number of shares 431,339,663 463,558,252 463,558,252
outstanding
at end of period
* Before items affecting comparability
** First nine months 1998
In certain cases adjusted for the bonus issue component in the redemption of
shares. The average number of shares for the period October 1, 1997 through
September 30, 1998 was 458,188,487. For full-year 1997 and 1996, the average
number of shares was 463,558,252.
Quarterly Data
SEK M
Q2/97 Q3/97 Q4/97 Q1/98 Q2/98 Q3/98
Sales, incl. 3,994 4,173 3,883 3,741 3,978 4,155
tobacco tax
Less tobacco tax -2,052 -2,219 -1,998 -1,902 -2,003 -1,932
Sales 1,942 1,954 1,885 1,839 1,975 2,223
Cost of goods -968 -959 -881 -894 -992 -1,162
sold
Gross income 974 995 1,004 945 983 1,061
Sales and -571 -540 -622 -596 -640 -669
administration
costs, etc.
Shares in 4 5 3 3 3 3
earnings of
associated
companies
407 460 385 352 346 395
Item affecting
comparability - - - - -48
Operating income 407 460 385 352 298 395
Net interest -4 -6 -4 -4 -13 -39
expense
Other financial 3 -17 -18 -7 -6 -22
items, net
Item affecting -
comparability -60
Net financial -1 -23 -22 -11 -79 -61
items
Income after
financial 406 437 363 341 219 334
items
Income taxes -110 -155 -131 -111 -95 -118
Minority -2 2 1 0 2 6
interests
Net income 294 284 233 230 126 222
Sales by Division
SEK M Full
year
Q1/97 Q2/97 Q3/97 Q4/97 1997 Q1/98 Q2/98 Q3/98
Chewing 295 261 312 281 1,149 267 265 280
Tobacco
Cigarettes 349 430 414 353 1,546 328 362 401
Cigars 151 186 161 193 691 187 225 230
Lighters 211 226 210 187 834 196 184 177
Matches 303 349 297 350 1,299 324 343 473
Pipe Tobacco 37 41 44 44 166 48 57 55
Snuff 238 267 281 293 1,079 295 330 346
Group-wide 100 182 235 184 701 194 209 261
operations
and
eliminations
Total 1,684 1,942 1,954 1,885 7,465 1,839 1,975 2,223
Operating Income by Division
SEK M Full
year
Q1/97 Q2/97 Q3/97 Q4/97 1997 Q1/98 Q2/98 Q3/98
Chewing 104 93 123 100 420 86 94 73
Tobacco
Cigarettes 94 144 175 124 537 92 92 142
Cigars 30 27 39 35 131 31 32 31
Lighters 10 13 16 14 53 14 3 -3
Matches 26 43 40 38 147 30 35 29
Pipe Tobacco 5 9 9 5 28 12 9 7
Snuff 115 117 138 152 522 149 152 182
Group-wide -50 -39 -80 -83 -252 -62 -71 -66
operations
and
eliminations
Item affecting
comparability -48 -
Total 334 407 460 385 1,586 352 298 395