AGM address 2008
Apr 22, 2008
Dear shareholders and honoured guests
2007 was yet another strong year for Swedish Match. The Group's sales increased in local currencies and, during the year, we have defended our strong position on the Scandinavian snuff market. In the United States, we have demonstrated strong growth for our snuff and gained further market shares, while we have advanced our positions on the cigar markets in the United States and Europe.
The investments made in recent years to strengthen Swedish Match as a leading company within the tobacco industry’s niche products have resulted in a positive growth for you, the shareholders. The Board proposes a 40% increase in the dividend to SEK 3.50, equal to 45% of earnings per share.
During the past five years, the share price has performed well and in line with Affärsvärlden's general index. In 2007, we have seen the share price increase by 20%, clearly outperforming the index for the same period.
During the year, we have continued with our buy-back programme and, in total, shares have been bought back for SEK 2,453 million. The diagram shows the amounts in the form of dividends and buy-back which have been transferred to you, the shareholders, over a five-year period.
For a number of years we have been able to witness consolidation in the tobacco industry. In 2007, two major transactions were announced. The British company, Imperial Tobacco, purchased the Franco-Spanish company, Altadis, while Japan Tobacco bought the British company, Gallaher. In 2008, Altria, which is best known as Philip Morris, was split up into two companies: Altria, which operates on the American market, and Philip Morris International which conducts all tobacco operations outside the United States.
Seen in this context, we are a relatively small player participating in the consolidation of companies within the cigar product area.
The tobacco industry is increasingly characterised by various forms of regulation and restriction. We are meeting this challenge by ensuring that we are always at the forefront as regards product development and adaptation to consumer wishes. We are witnessing changing consumption patterns, and it becoming increasingly important to offer the customer the right product for the right occasion.
The prevailing prohibition on the sale of snuff within the EU remains in force. In February 2008, the EU's scientific committee presented an evaluation which clearly indicates the relative health advantages of snuff over cigarettes. There is presently no scientific basis for maintaining the prohibition on the sale of snuff.
In Sweden, the Government announced further tax increases on snuff and cigarettes during the year. Once again, the tax on snuff was increased more than that on cigarettes, which is entirely illogical from a public health perspective. Sweden has for a long time served as a model country as regards reductions in tobacco-related illnesses, with a switch over from cigarettes to snuff having played an important role. Today, the percentage of smokers in Sweden is among the lowest in the world.
Allow me now to comment briefly on the Group's results.
Last year was a good year for Swedish Match, despite the weak start to the year due to stockpiling pending the increase in tax on snuff in Sweden at the turn of last year.
Sales amounted to SEK 12,551 million, a decrease of 3% but unchanged in local currencies. Operating profit was SEK 2,997 million, which was 9% lower than last year. Earnings per share were SEK 7.82.
Contributory factors to the weaker result included, primarily, the effects of stockpiling in Sweden at the end of 2006, increased market investments and weaker US dollar. Some 40% of the Group's operating profit is generated in North America and we thus the ever-weaker dollar has had a strong negative impact on our results. As the effects of the stockpiling wore off during the year, the Group's earnings per quarter have improved gradually.
Allow me now to comment in brief on the various product segments.
Within the snuff product area, we enjoy a strong position in Scandinavia with growing markets in both Norway and within Tax Free. As you can see, volumes in Norway and also Tax Free are growing by 15-20% per year. We foresee continued positive volume growth on these markets in the coming years.
In Sweden, we are maintaining our strong position within the important premium segment, with a market share in excess of 97%. Our classic, strong brands such as General, Grovsnus, Ettan and Göteborgs Rapé continue to be the self-evident product of choice for most Swedish snuff users.
In the low-price segment we have strengthened our position through our Kronan brand. Our market share is almost 60%. The Swedish market declined in 2007 as a consequence of stockpiling and tax increases. In order to offset the volume reduction in Sweden, last year we carried out price increases during the second-half of the year. The full impact on earnings of these price adjustments will be felt during the current year.
We are continuing to engage in intensive product development for our Scandinavian markets, with the most recent additions being General Sterk and Vertigo. General Sterk is a stronger snuff for which there is demand in Norway, while Vertigo is primarily aimed at women.
In the United States, we are well-positioned on a strong growth market. During the year, our Longhorn brand was the fastest growing brand in the category. Our share of the American market increased in 2007 to 11.8%.
At the end of last year we began an extensive launch of Red Man Moist Snuff. This is a priceworthy snuff with a premium feel. The product has been well received by both the retail trade and consumers and we anticipate positive growth in the coming years.
Sales through the year amounted to SEK 3,289 million, a decline of 2.2%, and operating profit was SEK 1,366 million. The operating margin was 41.5%. Both sales and earnings were affected by the stockpiling at the beginning of the year and increased investment in product development and marketing. Earnings and margins improved significantly towards the end of the year.
A few words about cigars
During the year we have worked purposefully to strengthen our European and North American cigar operations. We carried out two strategic acquisitions: Bogaert Cigars in Belgium and Cigars International in the United States. Both of these companies fit in well with our strategy and position us in a growth sector.
With the acquisition of Bogaert, we have strengthened our position on the European market, primarily in the Benelux countries, France and Germany. Bogaert is a rapidly expanding cigar producer with cost-efficient manufacturing in Indonesia. Production and sales take place under its own brands, Bogart and Hollandia, as well as private label cigars.
On the North American market, we have strengthened our position through the acquisition of Cigars International, a rapidly growing distributor and retailer of premium cigars, with Internet and mail order sales.
On the European market, a number of new products were introduced to secure organic growth. Products introduced during the year include Moments, Heeren van Ruysdal Limited Edition and Hajenius de Dam and others.
The American market demonstrated stable growth as regards premium cigars, where we have been a market leader for many years, while machine-made cigars demonstrated somewhat weaker volume growth. In the premium segment, among other products we launched the exclusive Stradivarius cigar. As regards machine-made cigars, we introduced a new concept, Foil Fresh, which guarantees the freshness of the cigar for many months.
Sales last year reached SEK 3,411 million, which was an improvement of 6% in local currencies, but in Swedish kronor was in line with the preceding year. Operating profit fell somewhat to SEK 737 million, but increased by 2% in local currencies. The operating margin was 21.6%.
Swedish Match is the largest player on the American chewing tobacco market and we have retained our 45% market share. Volumes within the category are declining each year but, thanks to price adjustments, new products and strong brands such as Red Man and Southern Pride, chewing tobacco generated strong earnings also in 2007. Sales were down 10% to SEK 956 million, but up 2% in local currency. Earnings closed at SEK 312 million, with an operating margin of 32.7%.
Pipe tobacco
This is a category in which Swedish March is a leading global player. Thanks to the strong Borkum Riff brand and local brands such as Best Blend and Boxer in South Africa, Swedish Match has retained sound earnings and cash flow from this business.
Sales in 2007 amounted to SEK 851 million, with an operating profit of SEK 201 million. The weaker earnings are largely due to the costs of closing one of our plants in South Africa and weakness of the local currency, the rand.
A few words about lights
Within this category, too, Swedish Match is one of the world's leading producers and owns a number of strong brands throughout the world. Solstickan is the example best known to us Swedes, but Redheads in Australia, Fiat Lux in Brazil and Bryant & May in England are also well known and strong brands. Cricket is our global brand for quality lighters. Profitability has improved significantly since the restructurings carried out in recent years.
Sales amounted to SEK 1,473 million and operating profit to SEK 252 million. The operating margin was 17.1%.
If we look back over the past year for the Group as a whole, we can conclude that our strategic focus on organic growth, complementary acquisitions, productivity and efficient employment of capital has resulted in a continued positive development of the company. The Group's sales during the fourth quarter were at an all time high, which confirms that our growth enhancement measures and investments are generating positive results.
Allow me to conclude with a few words about the future.
We will continue to focus on the categories which have the greatest growth potential, namely snuff and cigars, and will do so primarily through product development, new products and a more consumer-oriented product portfolio.
As a result of this, we believe that the Group's underlying sales and operating profit are expected to increase compared with 2007.
On the Scandinavian market, the measures carried out are expected to result in improved margins and increased operating profit compared with the preceding year.
Within the snuff product area, we are planning for continued volume growth and an increased market share in the United States.
As regards the cigar product area, the acquisitions carried out in the United States and Europe last year will make a positive contribution to earnings.
Swedish Match is today a global group within the tobacco industry’s niche segments, with high profitability, a strong product portfolio, sound governance and, first and foremost, skilled and loyal employees. It has been a real pleasure to take part in this ten-year journey and Swedish Match today stands well equipped for the future.
Thank you!