Interim Report January € June 1998

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.