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DOC, 111 kB - SWEDISH MATCH

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DOC, 111 kB - SWEDISH MATCH

Interim Report

Januari September 1998

; Consolidated sales rose to SEK 6,037 M (5,580).

    ; Operating profit amounted to SEK 1,045 M (1,201).

    ; Net profit amounted to SEK 578 M (812).

    Compared with the year earlier period, Swedish Match sales during the first nine months of 1998 rose 8% to SEK 6,037M(5,580). SEK 390 M of the sales increase a attributable to acquitions, mainly within the Match Division.

    Sales of 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 profit declined due to lower volumes in the Swedish market.

    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.

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

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Sales by Division

    First nine months Percent 12 months ended Full year

    SEK M 1998 1997 change Sept 1998 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

    Koncerngemensamt och 664 517 28 848 701

    elimineringar *

    Summa 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 JanuarySeptember 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

     First nine months Percent 12 months Full year

    SEK M 1998 1997 change Sept 30, 1998 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

    Koncerngemensamt och -199 -169 -282 -252

    elimineringar *

    -48 - -48 - Jämförelsestörande post

    Summa 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.

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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

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    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).

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    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

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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 Sales and value Price paid by

    Swedish Match Retail sales 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 Gul

    Cigarettes 5.28 5.17 5.40 4.91 33.82 24.42 44.50 34.50

    (highest

    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

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    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

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Consolidated Income Statement in summary

     12 months Full SEK M First nine months Percent ended year

     1998 1997 change Sept 30,1998 1997

    Sales, incl. tobacco tax 11,874 11,348 5 15,757 15,231 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 administration

     costs, etc -1,905 -1,659 -15 -2,527 -2,281 Share in earnings of

     associated companies 9 14 -36 12 17

     1,093 1,201 -9 1,478 1,586 Item affecting comparability * -48 - - -48 - Operating income 1,045 1,201 -13 1,430 1,586

    Net interest expense -56 -13 -60 -17 Other financial items, net -35 7 -53 -11 Item affecting comparability ** -60 - -60 - Net financial items -151 -6 -173 -28 Income after financial items 894 1,195 and minority interests-25 1,257 1,558 Taxes -324 -381 - -455 -512 Minority interest 8 -2 9 -1 Net income for the period 578 812 -29 811 1,045

     * Tranfer of production from Geraardsbergen, Belgium ** Risk exposure in Asia.

    Consolidated Balance Sheet in summary

    SEK M Sept 30, 1998 Dec 31,1997

    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 liabilities 8,591 7,132

    Operating capital 4,753 3,975 Net debt 2,082 471

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Key Data

     12 month ended Full year Full year

     Sept 30, 1998 1997 1996

    Operating margin, %* 18,7 21.2 23,2 Return on operating capital, %* 35,0 42.7 49,9 Return on shareholders' 35,4 39.5 57,3 equity, %

    Interest coverage ratio, times 10,8 24.9 9,6 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 employees 9,199 ** 6,467 6,580

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 outstanding at end of period 431,339,6463,558,252 463,558,25

    63 2

     * 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. tobacco tax 3,994 4,173 3,883 3,741 3,978 4,155 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 sold -968 -959 -881 -894 -992 -1,162 Gross income 974 995 1,004 945 983 1,061 Sales and administration

     costs, etc. -571 -540 -622 -596 -640 -669 Shares in earnings of

     associated companies 4 5 3 3 3 3

     407 460 385 352 346 395

    Item affecting

     comparability - - - - -48 Operating income 407 460 385 352 298 395

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    Net interest expense -4 -6 -4 -4 -13 -39 Other financial items, net 3 -17 -18 -7 -6 -22 Item affecting comparability -60 - Net financial items -1 -23 -22 -11 -79 -61 Income after financial

     items 406 437 363 341 219 334 Income taxes -110 -155 -131 -111 -95 -118 Minority interests -2 2 1 0 2 6 Net income 294 284 233 230 126 222

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