Interim Report January June 1998
8/11/1998 9:14 AM EST
Interim Report
January - June 1998
Consolidated sales rose to SEK 3,814 M (3,626).
Operating profit amounted to SEK 650 M (741).
Net profit amounted to SEK 356 M (528).
Intensified efforts to increase efficiency of production plants.
Items affecting comparability against income amounted to
SEK 108 M.
Continued sharp increase in sales and operating profit for snuff.
Swedish Match sales during the first six months of 1998 rose 5% to SEK 3,814
M, compared with SEK 3,626 M during the corresponding period in 1997.
Operating profit declined to SEK 650 M, down from SEK 741 M. An item affecting
comparability amounting to SEK 48 M was charged against operating profit for
the period.
The Snuff Division reported continued strong growth, with a sharp increase in
sales and operating profit. The Cigarette Division's sales and operating
profit declined due to lower volumes in the Swedish market.
Summary of Consolidated Income Statement
SEK M First six months
1998 1997
Sales 3,814 3,626
Operating profit 650 741
Profit after financial items 560 758
Net profit 356 528
Sales by Division
SEK M 12
First six Percen months Full
months t ended year
1998 1997 change June 1997
30,98
Chewing Tobacco 532 556 -4 1,125 1,149
Cigarettes* 690 779 -11 1,457 1,546
Cigars 412 337 22 766 691
Lighters 380 437 -13 777 834
Matches 667 652 2 1,314 1,299
Pipe Tobacco 105 78 35 193 166
Snuff 625 505 24 1,199 1,079
Group-wide
operations 403 282 43 822 701
And
eliminations*
Total 3,814 3,626 5 7,653 7,465
* After May 1, 1997, external invoicing of Prince cigarettes is reported under
Group-wide operations. Subcontracted production remains within the Cigarettes
Division. The change means that of total sales of Prince during the January-
June 1998 period, which amounted to SEK 220 M, SEK 71 M was reported in the
Cigarettes Division and SEK 149 M in Group-wide operations.
Operating Profit by Division
SEK M 12
First six Percent months Full
months ended year
1998 1997 change June 1997
30,98
Chewing Tobacco 180 197 -9 403 420
Cigarettes *) 184 238 -23 483 537
Cigars 63 57 11 137 131
Lighters 17 23 -26 47 53
Matches 65 69 -6 143 147
Pipe Tobacco 21 14 50 35 28
Snuff 301 232 30 591 522
Group-wide
operations -133 -89 -296 -252
and
eliminations *)
Item affecting
-48 -48
Comparability
Total 650 741 -12 1,495 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 during the first six months of 1998 amounted to SEK 532 M, a decline of
SEK 24 M, or 4%, compared with the first six months of 1997. Expressed in
local currencies, sales were down 10%. The decline in sales was due primarily
to total market decline, somewhat lower market shares and hoarding
(stockpiling) at the retail level during the fourth quarter of 1997. The
market was characterized by more intense price pressure.
Operating profit declined 9% to SEK 180 (197), due mainly to volume decline.
Cigarettes
The Swedish market accounts for 75% of sales invoiced by the Cigarettes
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 first six months of 1998 amounted to SEK 690 M, a decline of
SEK 89 M, or 11%, compared with the first half of 1997. Hoarding in the
Swedish market toward year-end 1996 had an adverse impact, estimated at SEK 75
M, on sales during the first quarter of 1997. The new agreement regarding
Prince cigarettes, which became effective on May 1, 1997, had a negative
effect on sales from the Division of approximately SEK 110 M, compared with
the first six months of 1997.
During 1997 the tobacco tax on cigarettes in Sweden was raised 63%, which
caused a sharp increase of illegal trade. Regular deliveries to the total
Swedish Market declined from approximately SEK 3 billion cigarettes during the
first half of 1997 (without the hoarding effect, the figure would have been
approximately 3.35 billion) to about 2.5 billion cigarettes during the first
half of 1998.
Operating profit was down 23% to SEK 184 M (238). The effects of hoarding on
operating profit toward year-end 1996/1997 have been estimated at
approximately SEK 45 M. Higher marketing costs caused by the re-launch of
Blend cigarettes were charged against income for the period. Production
rationalization measures had favorable effects on operating profit.
Cigars
The Cigar Division is one of the world's largest manufacturers of cigars and
cigarillos. Western Europe is the most important market.
Sales during the first six months of 1998 totaled SEK 412 M (337), an increase
of 22% compared with the first half of 1997. Two new operating units have been
consolidated in 1998: cigar operations in Finland and Swedish Match Australia
Pty. The operations contributed sales of SEK 60 M during the first half of
1998.
Operating profit amounted to SEK 63 M (57). Substantial costs for intensified
marketing in the U.S. had a negative effect on operating profit.
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 during the first half of 1998 declined 13% to SEK 380 M (437). Volumes
fell in Asia/Pacific and in North America and prices were down in
Asia/Pacific.
Operating profit declined by SEK 6 M to SEK 17 M. Productivity improvements
did not compensate fully for the negative effects of lower prices and volumes
on earnings.
Matches
The Match Division is the world's only global manufacturer of matches. Sales
by the Division are concentrated primarily in Europe and Brazil, although
large export volumes are sold to approximately 100 other countries. The
Division also manufactures match production equipment through Swedish Match
Arenco.
Sales during the first six months of 1998 amounted to SEK 667 M (652). Lower
volumes of match sales, particularly in Europe, were offset in part by higher
sales invoiced by Arenco.
Operating profit was down SEK 4 M to SEK 65 M. Productivity improvements
yielded favorable effects on profit, which were offset by lower volumes.
During the period under review, additional shares in PLAM Bulgarski Kibrit
JSCO were acquired, bringing Swedish Match's holding to more than 90%. Sales
by the Bulgarian company during the first half of 1998 amounted to
approximately SEK 10 M.
Swedish Match Kav, the Turkish match company, was consolidated for two months
during the period. Sales in the first half of 1998 totaled SEK 11 M.
Additional shares have been acquired in the two investment companies in
Singapore that own 39% of the shares in Wimco Ltd., India. The holding in the
investment companies is thereafter 94%. Wimco is included in this interim
report as an associated company.
Swedish Match intends to terminate production of advertising matches in
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 35% to SEK 105 M (78). Operating profit improved by SEK 7 to SEK 21
M. The takeover of the right to market Borkum Riff in the U.S. had a favorable
impact on the Division's sales and operating profit.
Snuff
The Snuff Division's largest markets are Sweden (incl. duty-free sales) and
the U.S.
Sales during the first six months of 1998 amounted to SEK 625 M (505), an
increase of 24% over sales in the year-earlier period.
Swedish Match's share of the U.S. market continued to increase during the
first half of 1998, rising to 4.1% (2.8). At year-end 1997 the market share
was 3.2%. The Swedish market, including duty-free sales, rose in volume by
about 4% compared with the year-earlier period.
The price of Timber Wolf in the U.S. market was raised from USD 0.70 to USD
0.90 during the first quarter of the year, in line with a price hike
previously implemented by US Tobacco. The corresponding price during the first
half of 1997 was USD 1.10, which was reduced in August of the same year due to
intensified price competition.
Operating profit rose 30% to SEK 301 M (232) on the strength of higher volumes
in Sweden (including duty-free) and the U.S., as well as improvements in the
Swedish product mix. Stronger focus was placed on marketing in both Sweden and
the U.S. during the second quarter.
Group-wide operations
The net costs for the Group-wide operations increased to SEK 133 M (89). The
figure includes sponsorship costs for participation in the Whitbread Round the
World Race and costs incurred for the Swedish Match Global Challenge, an
internal project. The sponsorship will be terminated during the third quarter
1998.
Acquisitions
Swedish Match has established its own operation in Australia during the first
half of 1998 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 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 in Australia. The acquisition is expected to increase
consolidated sales by about SEK 50 M annually.
Financial Results
Net interest expense during the first half of 1998 totaled SEK -17 M (expense:
7). Other financial items, a net expense of SEK 13 M (income: 24), are
attributable primarily to exchange rate movements related to financial assets
and liabilities, as well as costs incurred for the redemption program. 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 half of 1998 amounted to SEK 261 M (121).
Depreciation according to plan totaled SEK 159 M (142). Cash and bank
balances, including short-term investments, totaled SEK 862 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 1,016 M, an increase of SEK 545 M since
December 1997.
Average Number of Group Employees
The average number of Group employees during the first half of 1998 was 7,057,
compared with 6,272 in the first half of 1997. The average number of employees
in Sweden was 1,467, compared with 1,475 last year.
Tobacco Tax
During the past 12-month period, total tobacco tax and value-added tax on
tobacco products paid by Swedish Match in Sweden amounted to SEK 9,812 M
(9,197).
Significant Events after the End of the Reporting Period
Reduction of tobacco tax in Sweden
Swedish Parliament has resolved to reduce the tobacco tax imposed on
cigarettes in Sweden, effective August 1, 1998. As a result, the unit price
per cigarette will be reduced from SEK 0.85 to SEK 0.20, while that portion of
taxes related to the retail price will be raised from 17.8% to 39.2%. Swedish
Match will adjust its prices at the same time. Price cuts for major products
are shown below.
Sale price Sales and Price paid
Swedish Retail sales value added by consumer
Match margin tax
Befor After Befor After Befor After Befor After
e 8/1/9 e 8/1/9 e 8/1/9 e 8/1/9
8/1/9 8 8/1/9 8 8/1/9 8 8/1/9 8
8 8 8 8
Blend
Gul 5.28 5.17 5.40 4.91 33.82 24.42 44.50 34.50
Cigar
ettes
(high
est
fixed
price
)
Redemption
On July 7, 1998, an extraordinary general meeting of 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 to shareholders who had applied for redemption at the end of July.
The extraordinary general meeting 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.
Outlook
Efforts to increase the efficiency of Group production plants have been
intensified this year. Decisions on additional rationalization measures are
expected during the second half of 1998. Costs for the proposed structural
changes have been estimated at approximately SEK 100 M. Savings from the
rationalization program will yield favorable effects on income beginning in
1999. 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.
Other Information
This report has not been reviewed by Swedish Match auditors.
The interim report for operations during the nine-month period ended September
30, 1998 will be published on October 23, 1998.
Göran Lindén
President and Chief Executive Officer
Consolidated Income Statement in summary
12 months Full
SEK M First six months Percent ended year
1998 1997 change June 1997
30,1998
Sales, incl. 7,719 7,175 8 15,775 15,23
tobacco tax 1
Less tobacco tax -3,905 -3,549 -10 -8,122 -
7,766
Sales 3,814 3,626 5 7,653 7,465
Cost of goods sold -1,886 -1,775 6 -3,726 -
3,615
Gross profit 1,928 1,851 4 3,927 3,850
Sales and
administration -1,236 -1,119 10 -2,398 -
costs, etc 2,281
Share of earnings
in 6 9 -33 14 17
associated
companies
698 741 -6 1,543 1,586
Item effecting -48 - - -48 -
comparability*
Operating profit 650 741 -12 1,495 1,586
Net interest -17 -7 -27 -17
expense
Other financial -13 24 -48 -11
items, net
Risk exposure -60 -60
Net financial items -90 17 -135 -28
Profit after 560 758 -26 1,360 1,558
financial items
Taxes -206 -226 9 -492 -512
Minority interest 2 -4 5 -1
Net profit 356 528 -33 873 1,045
*Tranfer of production from Geraardsbergen, Belgium
Consolidated Balance Sheet in summary
SEK M June 30, Dec 31,1997
1998
Intangible fixed assets 876 757
Tangible fixed assets 2,410 2,226
Financial fixed assets 296 308
Current operating assets 3,242 3,125
Current financial receivables 143 153
Cash and bank 862 563
Total assets 7,829 7,132
Shareholders' equity 2,787 2,972
Minority interests 79 20
Provisions 752 656
Long-term loans 655 209
Other long-term liabilities 33 27
Short-term borrowings 1,223 825
Other current liabilities 211 290
Current operating liabilities 2,089 2,133
Total equity, provisions and 7,829 7,132
liabilities
Operating capital 4,439 3,975
Net debt 1,016 471
Key Data
12 month ended Full year
June 30, 1998 1997
Operating margin, %* 20.2 21.2
Return on operating 38.8 42.7
capital, %*
Return on shareholders' 33.1 39.5
equity, %
Interest coverage ratio, 16.0 24.9
times
Debt/equity ratio, % 35.5 15.7
Equity/assets ratio, % 36.6 41.9
Investments, SEK M 294 292
Average number of 7 057** 6,467
employees
Share data
Income per share after
full tax,
before items affecting 2.07 2.25
comparability 1.88 2.25
after items affecting 6.01 6.41
comparability
Shareholders' equity per
share, SEK
Number of shares 463,558,252 463,558,252
outstanding
* Before item affecting comparability
** First six months 1998
Quarterly Data
SEK M
Q1/97 Q2/97 Q3/97 Q4/97 Q1/98 Q2/98
Sales, incl. 3,181 3,994 4,173 3,883 3,741 3,978
tobacco tax
Less tobacco tax -1,497 -2,052 -2,219 -1,998 -1,902 -2,003
Sales 1,684 1,942 1,954 1,885 1,839 1,975
Cost of goods -807 -968 -959 -881 -894 -992
sold
Gross profit 877 974 995 1,004 945 983
Sales and
administration -548 -571 -540 -622 -596 -640
costs, etc.
Shares of
earnings in 5 4 5 3 3 3
associated
companies
334 407 460 385 352 346
Item affecting
comparability - - - - - -48
Operating profit 334 407 460 385 352 298
Net interest -3 -4 -6 -4 -4 -13
expense
Other financial 21 3 -17 -18 -7 -6
items, net
Risk exposure -60
Net financial 18 -1 -23 -22 -11 -79
items
Profit after
financial 352 406 437 363 341 219
items
Income taxes -116 -110 -155 -131 -111 -95
Minority -2 -2 2 1 0 2
interests
Net profit 234 294 284 233 230 126
Sales by Division
SEK M Full
Q1/97 Q2/97 Q3/97 Q4/97 year Q1/98 Q2/98
1997
Chewing 295 261 312 281 1,149 267 265
Tobacco
Cigarettes 349 430 414 353 1,546 328 362
Cigars 151 186 161 193 691 187 225
Lighters 211 226 210 187 834 196 184
Matches 303 349 297 350 1,299 324 343
Pipe Tobacco 37 41 44 44 166 48 57
Snuff 238 267 281 293 1,079 295 330
Group-wide
operations 100 182 235 184 701 194 209
and
eliminations
Total 1,684 1,942 1,954 1,885 7,465 1,839 1,975
Operating Profit by Division
SEK M Full
Q1/97 Q2/97 Q3/97 Q4/97 year Q1/98 Q2/98
1997
Chewing 104 93 123 100 420 86 94
Tobacco
Cigarettes 94 144 175 124 537 92 92
Cigars 30 27 39 35 131 31 32
Lighters 10 13 16 14 53 14 3
Matches 26 43 40 38 147 30 35
Pipe Tobacco 5 9 9 5 28 12 9
Snuff 115 117 138 152 522 149 152
Group-wide
operations -50 -39 -80 -83 -252 -62 -71
and
eliminations
Item affecting
-48
comparability
Total 334 407 460 385 1,586 352 298
Key Data and Data per Share, pro forma
In view of the share redemption program, the Group's key data has been
calculated pro forma in the table below. In the calculation, the redemption
amount has been treated as paid in the beginning of the period.
Result, rolling Pro forma,
12-mths through Adjustmen rolling
June 30, 1998 ts 12-months
Number of shares 463,558,252 - 431,339,663
32,218,58
9
Income per share, 1.83 *) 1.93
SEK
Shareholders' equity 5.87 *) 3.80
per shares, SEK
Equity/assets ratio, 36.6 22.0
%
Return on 33.1 56.0
shareholders equity,
%
*Since the redemption price per share exceeds the share price, rolling-12-
month income per share and shareholders' equity through June 30, 1998 have
been adjusted to facilitate comparisons with income per share and
shareholders' equity per share prior to redemption. Without the adjustments,
income per share and shareholders' equity per share during the 12-month period
under review amounted to SEK 1.88 and SEK 6.01, respectively.