AGM address 2005
Apr 27, 2005
Distinguished shareholders and honored guests,
You own a unique tobacco company. Swedish Matchs operations are in the area of niche tobacco products: snuff, cigars, chewing tobacco and pipe tobacco. The world market for these niche products amounts to some 15 billion USD, which can be compared with the global value of cigarette sales, amounting to 345 billion USD. Niche tobacco products thus represent less than 5 percent of the global tobacco market.
Swedish Matchs tobacco products have strong market positions and favorable profitability. The operations generate strong cash flows, which we have used over the years for profitable acquisitions in the cigar and pipe tobacco product areas. In addition, capital is transferred to shareholders in the form of share buybacks and dividends.
The snuff and cigar product areas have shown growth in terms of both sales and earnings over a relatively long period. Swedish Match endeavors to conduct its operations in a profitable, efficient and ethically correct manner, maintaining respect for human rights and the environment. Awareness of social issues has always been an integral part of our corporate culture.
At the beginning of 2004, we adopted a Code of Conduct for social and environmental issues. It gives us a framework regarding issues relating to human rights, business ethics, and health and safety. During the year, we also introduced a follow-up process aimed at making sure that we live up to the requirements and guidelines contained in the Code of Conduct. These strategies, combined with improved productivity, have resulted in a high return for you as shareholders. Since 2000, earnings per share have risen from 2.76 SEK to 5.61 SEK, an average increase of 20 percent per year. The increase in the Swedish Match share price shows a substantially more favorable trend than an index for the Stockholm Stock Exchange. During the most recent five-year period, from April 2000 to April 2005, an investment in Swedish Match has increased in value by 234 percent. Among the companies in the list of the Stockholm Stock Exchanges most actively traded shares, Swedish Match has shown the second best price trend over a five-year period.
Our stated philosophy is that capital not needed for operations should be returned to shareholders through buybacks and dividends. As the table shows, a total of 7.8 billion SEK has been transferred to shareholders during the past five years in the form of dividends totaling 2.7 billion SEK, share redemption programs amounting to nearly 1 billion SEK and share buybacks totaling 4.1 billion SEK.
Today, Swedish Match has nearly 92,000 shareholders. Foreign ownership amounts to 75 percent and is concentrated to the US and the UK. Among the largest foreign institutional shareholders we find Wellington, Fidelity, Threadneedle and Capital Group. The Swedish institutional shareholders include Handelsbanken Fonder, Robur, Länsförsäkringar and several of the AP funds.
Permit me to continue by giving a more detailed picture of todays Swedish Match while I comment on the past year. I will then touch briefly on developments during the first quarter and conclude with some thoughts about the future.
Sales during 2004 amounted to SEK 13 billion. Swedish Match is today an international company. Our brands and products are distributed to millions of consumers in more than 150 countries. We have focused on developing a broad product portfolio, with leading and strong positions in many markets. Our international structure enables us to utilize many marketing opportunities, which is a key future competitive advantage.
Operating income amounted to 3.4 billion SEK, an increase of slightly more than 1 billion SEK compared with 2003. Earnings for 2004 were affected by a number of nonrecurring items. After pursuing a damages claim for two years against our American snuff competitor UST for anticompetitive actions, we agreed to a settlement that resulted in revenue of slightly more than 1.5 billion SEK. We have every reason to be pleased with this agreement. During the year, we implemented rationalization projects and made certain write-downs of fixed assets. In combination, these measures resulted in nonrecurring expenses of 475 MSEK. We have entered 2005 with a considerably more competitive organization. Cash flow from operations improved by approximately 1 billion SEK to 3.6 billion SEK. Our net indebtedness was substantially reduced, to 527 MSEK. The Groups financial position has never been stronger. Earnings per share increased by 20 percent to 5.61 SEK. The Board of Directors has recommended that the dividend to shareholders be increased by 0.20 SEK to 1.90 SEK, giving a total dividend of 612 MSEK.
Now I would like to comment briefly on the different product areas, beginning with snuff: Swedish Match is the only company that is active in the major markets for snuff. We are the leader in the Nordic region and number two in South Africa. In the US we are number three in a market that is currently showing favorable volume growth. In Sweden, snus has undergone a unique revival after having been out-competed by cigarettes, snus has made a fantastic comeback and more than doubled its volumes since 1970. There are one million snus users in Sweden. Approximately half of these are former smokers and a considerable number nearly 200,000 are women. During 2004, we sold 208 million cans of snus in Scandinavia, a 1-percent increase compared with 2003. Today, snus is accepted in all social classes and is used by both men and women. The worlds largest market for snuff is in the US. It is nearly five times larger than the Scandinavian market. The total market is growing and currently amounts to approximately 1 billion cans. Our share of the market amounts to about 9 percent.
Swedish Match has two strong brands: Timber Wolf, which has been on the market for 10 years, and Longhorn, which was launched during 2003 to meet increasing price competition in the US market. Sales for the product area during 2004 amounted to 3.081 billion SEK, a 3-percent increase. Operating income amounted to 1.3 billion SEK, a decline of 1 percent.
And now a few comments on cigars As a result of our acquisitions in the US, Swedish Match is today the worlds second largest cigar company. We have some 30 brands that are sold in more than 90 countries. Sales amount to 3.2 billion SEK. The cigars are produced in our plants in the US, the Dominican Republic, Honduras, Belgium and Indonesia. We sell and market an extensive range of cigars in the US. Demand for flavored, machine-produced cigars continued to be strong during 2004. We are focusing on continually launching new product variants. Nearly half of the years sales were attributable to products developed during the past three years within the framework of the White Owl brand. In the slightly more exclusive market for hand-rolled cigars, Swedish Match is largest in the US, with a market share of approximately 30 percent. Volumes increased during the year. Our leading brand is Macanudo, the worlds top-selling premium cigar. We also have a number of classic brands, such as Cohiba, Partagas, La Gloria Cubana and Hoyo de Monterrey. During April, Swedish Match acquired the 36 percent of shares outstanding in General Cigar, making Swedish Match the sole owner of one of the worlds leading producers of premium cigars. This base provides excellent prospects for continued profitable growth through integration and synergies with our North America division.
Sales in Europe are dominated by machine-made cigars. La Paz is one of the better-known cigar brands. The new Salsa cigar was introduced during last year. Here in Sweden, the classic Bellman is a well-known brand. The focus in Europe during 2004 was on new product launches, management changes and substantial cost savings. Sales for the entire product area amounted to 3.1 billion SEK, a 5-percent increase. Operating income improved by 19 percent to 466 MSEK.
I am now going to move on to chewing tobacco and pipe tobacco. With our strong Red Man brand, which marked its centenary in 2004, we are among the leaders in the North American market for chewing tobacco. Another of our brands is Southern Pride, introduced in 1998, which has shown favorable volume growth. We are also a leading player in the pipe tobacco market. Borkum Riff is one of the worlds best-known brands, and we have achieved export success in Asia and other regions. Other strong brands are Boxer and Best Blend in South Africa and Half and Half in the US. Despite a general decline in the consumption trend for chewing tobacco and pipe tobacco, our strong brands continue to generate favorable earnings and strong cash flows. The figures for chewing tobacco were adversely affected by the weak US dollar, while a strengthening of the rand in South Africa had a positive impact on earnings from pipe tobacco.
Chewing tobacco sales declined by 8 percent during the year to 1 billion SEK. In local currency, however, sales revenues increased and our market position was strengthened. Operating income declined by 10 percent to 304 MSEK.
Pipe tobacco sales declined during the year by 1 percent to 901 MSEK. Operating income improved by 9 percent to 220 MSEK.
With regard to matches and lighters, we supply consumers in 145 countries with our products. Our match brands are local and very strong. Examples include Solstickan in Sweden and Three Stars in other countries. Our best known brand of lighter is Cricket. Operations in these product areas are exposed to fierce price competition, and volumes are also declining in some markets. We will continue our efforts to rationalize production and will prioritize more profitable products and markets. Our barbeque and fire-lighting products are an exciting new introduction. We predict rising demand for this type of product in the next few years. These products are examples of how we are building on our classic, strong brands. The Matches product area generated sales of 1.3 billion SEK and reported an operating loss of 57 MSEK. However, this loss includes 125 MSEK in restructuring costs. Sales for the Lighters product area amounted to 582 MSEK, and operating income declined to 7 MSEK. We recently presented our interim report for the first quarter of 2005 Sales amounted to 2.967 billion SEK, down 1 percent compared with the year-earlier period. Operating income improved by 4 percent to 528 MSEK. We have had a promising start to the new year and are beginning to see the effects of the savings programs. I am highly optimistic about developments during the rest of the year.
I would now like to say something about Swedish Matchs future. The majority of our profit derives from sales in those markets where we hold leading positions, in other words, principally the Nordic countries, the US, South Africa and Brazil. We continuously strive to secure and strengthen our positions in these countries. We entered the new year with a highly competitive product portfolio and strong market positions. We are constantly seeking new business opportunities. For cigars, which are a typical luxury product, consumption increases as living standards rise. This means there is long-term potential in a large number of markets, particularly in Eastern Europe and Asia. In the large markets in Europe and North America, certain segments are displaying strong growth. We are working intensively to reinforce our presence in these segments. We have noted a slowdown in the historical growth rate for sales of snus in Sweden. However, growth potential is being created through interesting new products and a more dynamic category of new consumers, primarily women. Effective June 1, smoking will be banned in restaurants in Sweden. This will create business potential. As more and more countries introduce bans on smoking in restaurants and cafés and in the workplace, new opportunities arise for players that can offer good alternatives to cigarette smoking. The Norwegian market has soared, with two-digit volume growth. There is much to suggest that the positive trend in Norway is set to continue. We conduct intensive research and development work in the snus area. Our goal is to always produce absolutely the best snus on the market. A can of snus from Swedish Match always preserves its consistently high quality when it is sold in stores and restaurants. We are constantly developing our range to meet the needs of new consumer segments. Our efforts to promote snus in Russia and tobacco chewing gum in Japan will be intensified during the year. Both of these export ventures are showing increased volumes and, despite the products being completely new in these markets, they have met with a promising response from consumers.
I would now like to comment on the ruling of the European Court of Justice in December regarding the ban on sales of snus within the EU. I would like to remind you that the Court has not stated that the ban must remain, but only that it is not illegal. This means that it is within the power of the politicians with responsibility in this area to remove the ban. We maintain that the ban is unreasonable from both a legal and a health viewpoint it deprives millions of European smokers of a good alternative to help them quit smoking. The legal avenues to revoke the ban are closed. Now, it is up to the politicians to lift the ban. Our belief is that facts and common sense will prevail in the long term and that the ban will one day be lifted. Within the framework of our financial strategy, we intend to continue to buy back shares. In the light of new proposed legislation pertaining to Swedish limited companies, the maximum limit for share buybacks up until the date of the next Annual General Meeting will be 2.3 billion SEK. This a higher amount than has historically been used for buybacks during any single year.
Finally, if I may summarize: You are owners of a unique company in the tobacco industry. Our strategy entails continued focus on: organic growth centered on our snus and cigar products ongoing efficiency improvements transfer of surplus funds to the shareholders by prioritizing share buybacks complementary acquisitions when the right opportunities arise By continuing to focus on and implement this strategy, I am completely convinced that we will see a continued positive trend for Swedish Match in the long term.
THANK YOU for listening.