Swedish Match Interim Report January-June 1999

Interim Report January - June 1999 * Sales increased 16 percent, to SEK 4,440 M * Operating income rose 36 percent, to SEK 884 M * Net income rose 53 percent , to SEK 543 M * Continued strong organic growth for Snuff and Cigars * Clearly apparent and lasting cost reductions * Agreement to sell the cigarette business for SEK 4,800 M * Swedish Match number two in the world in Cigars, after acquisition in the US Swedish Match's sales during the first half of 1999 increased by 16 percent, to SEK 4,440 M (3,814), of which acquisitions accounted for 10 percent. Operating income rose by 36 percent, from SEK 650 M to SEK 884 M, and Net income increased from SEK 356 M to SEK 543 M or 53 percent. Snuff continued to show a strong increase in volume of business, notably in the North American market. Snuff's operating income rose 23 percent, to SEK 371 M (301). Cigars reported a sharp increase in both sales (44%) and operating income (52%) based on organic growth, primarily in Western Europe and on an acquisition in the United States. The ongoing cost-savings program has resulted in lasting reductions in expenses. In line with the new strategy, which involves a sharper focus on product areas with good growth potentials such as smokeless tobacco (primarily snuff) and brown tobacco (cigars and pipe tobacco), acquisitions and divestments were made by Swedish Match. An agreement was reached covering the sale of the cigarette business to Austria Tabak for SEK 4,800 M. The cigarette operations were included in Swedish Match´s accounts up to and including June 30, 1999. A significant part of General Cigar's business in the U.S., with annual sales of SEK 800 M, was acquired during the first half of 1999. This business was consolidated effective May 1. Swedish Match then made a supplementary acquisition of premium cigars in the U.S. The latter operation is expected to be consolidated as of September 1. Summary of Consolidated Income Statement MSEK First six months 1999 1998 Sales 4,440 3,814 Operating income 884 650 Income after financial items 833 560 Net income 543 356 Sales by product area MSEK First six Percent 12 months Full months change ended year 1999 1998 % June 30, 1998 1999 Chewing Tobacco 539 532 1 1,075 1,068 Cigarettes 729 690 6 1,507 1,468 Cigars 594 412 44 1,084 902 Lighters 338 380 -11 693 735 Matches 849 667 27 1,755 1,573 Pipe Tobacco 108 105 3 221 218 Snuff 778 625 24 1,490 1,337 Other operations 505 403 25 995 893 Total 4,440 3,814 16 8,820 8,194 Operating income by product area MSEK First six Percen 12 months Full months t ended year change 1999 1998 % June 30, 1998 1999 Chewing Tobacco 146 180 -19 297 331 Cigarettes 255 184 39 509 438 Cigars 96 63 52 150 117 Lighters -6 17 -5 18 Matches 63 65 -3 132 134 Pipe Tobacco 28 21 33 45 38 Snuff 371 301 23 711 641 Other operations -69 -133 -164 -228 Subtotal 884 698 27 1,675 1,489 Items affecting - -48 - -60 -108 comparability Total 884 650 36 1,615 1,381 Chewing Tobacco Chewing tobacco operations are conducted in the North American market, primarily in the U.S. Sales in the first half of 1999 amounted to SEK 539 M (532). Stated in local currency, sales declined by 2 percent. Sales in the second quarter rose by 5 percent, to SEK 278 M (265). The total market for chewing tobacco is continuing to decline. Operating income fell by 19 percent, to SEK 146 M (180). Operating income in the second quarter of 1999 amounted to SEK 71 M (94). Cigarettes Cigarettes are sold in the Swedish and Estonian markets and in the tax-free market. During the second quarter an agreement was reached covering the sale of Swedish Match's cigarette business to Austria Tabak for SEK 4,800 M. The operation was sold as of July 1, 1999. Sales in the first half of the year increased by 6 percent, to SEK 729 M (690). Sales in the second quarter rose 5 percent, to SEK 379 M (362). The increase was attributable to larger volumes of sales of cigarettes, primarily in the Swedish market. Operating income for the six-month period increased by 39 percent, to SEK 255 M (184), and income in the second quarter rose to SEK 128 M (92). The increases were attributable to the larger volumes of business and cost reductions. Cigars Swedish Match is one of the world's largest producers of cigars. The Group's largest markets are Western Europe and the U.S. During the first quarter of 1999 an agreement was concluded covering the acquisition of a substantial portion of General Cigar's operations in the U.S. The acquired business comprises two production plants, machinery and equipment, plus inventories, and brand names, together with a sales force of approximately 70 persons and a total of about 1,000 employees. The business was consolidated effective May 1. As a result of the acquisition, Swedish Match is gaining annual SEK 800 M in annual sales and the increase in the Group's profit per share is expected to amount to between SEK 0.15 and SEK 0.20 beginning in the year 2000. Garcia y Vega, White Owl, Tiparillo and Tijuana Smalls are among the brands included in the acquisition. Cigar sales in the first half of 1999 amounted to SEK 594 M (412), an increase of 44 percent. The acquired operation contributed sales of SEK 143 M during the period. The organic growth is primarily the result of increases in volumes of business in Western Europe and Australia. Sales in the second quarter increased to SEK 370 M (225). Operating income during the six-month period increased by 52 percent, to SEK 96 M (63), and to SEK 57 M (32) in the second quarter, mainly the result of acquisitions and larger volumes of business. Lighters Swedish Match is one of the world's largest manufacturers of disposable lighters. Its largest markets are Europe, parts of Asia, and the U.S. Sales declined to SEK 338 M (380) in the first half of the year and to SEK 173 M (184) in the second quarter. Lighters incurred an operating loss of SEK 6 M (17) for the first half of the year and a loss of SEK 8 M (3) in the second quarter. Losses in efficiency as a result of the closing of the plant in Lyon, France, had a negative impact on results. Matches Swedish Match is the world's only global manufacturer of matches. The Group's principal markets are Europe, South America and Asia. Operations include Swedish Match Arenco, which produces machinery used in the manufacture of matches. In the beginning of 1999 Swedish Match concluded an agreement to acquire 40 percent of Indonesia's largest match producer, P. T. Java Match Factory. Sales increased by 27 percent, to SEK 849 M (667), in the first half of the year and to SEK 401 M (343) in the second quarter. The increase in sales was attributable primarily to acquisitions and consolidations of new units. Operating income in the six-month period declined to SEK 63 M (65), and to SEK 34 M (35) in the second quarter. The devaluation of the Brazilian real affected operating income negatively in the amount of SEK 10 M compared with income in the first half of 1998. Pipe Tobacco Swedish Match is one of the world's largest manufacturers of pipe tobacco. The principal markets are North America and Northern and Western Europe. Sales for the six-month period amounted to SEK 108 M (105) and to SEK 53 M (57) in the second quarter. Operating income for the six-month period rose by 33 percent, to SEK 28 M (21), and to SEK 11 M (9) in the second quarter. Snuff Swedish Match is the leading producer of snuff in the Swedish and Norwegian markets, and one of four leading manufacturers in the U.S. Sales in the first half of 1999 increased by 24 percent, to SEK 778 M (625), and by 22 percent, to SEK 402 M (330) in the second quarter. The volume of business in the U.S. rose by 51 percent, compared with first-half 1998 operations. The increase in volume in the Nordic market, including tax-free sales, amounted to 7 percent. Operating income in the six-month period increased by 23 percent, to SEK 371 M (301), and by 17 percent, to SEK 178 M (152) in the second quarter. Other Operations The net of Other Operations was a loss of SEK 69 M (-133 M) in the first half of 1999. Sustained cost savings were achieved. Net financial expense Net financial expense in the first half of the year amounted to SEK 69 M (- 17). The increase was attributable primarily to increased borrowing in connection with the SEK 1,216 M share redemption program implemented in 1998, and to acquisitions. Other financial items amounted to net income of SEK 18 M (-13). Investments The Group's direct investments in tangible fixed assets amounted to SEK 283 M (154). The investments pertained mainly to replacement and rationalization expenditures and to the take over of fixed assets amounting to SEK 130 M in connection with acquisitions of assets and liabilities. In addition, SEK 1,486 M (133) was invested in long-term intangible assets during the period. These investments pertained mainly to brand names and goodwill related to the acquisition of General Cigar's business in the U.S. Depreciation according to plan totaled SEK 182 M (159). Investments in associated companies amounted to SEK 50 M. Financing and liquidity Net debt at the end of the period amounted to SEK 3,079 M, an increase of SEK 1,624 M since December 1998. Cash and bank deposits, including short-term investments, amounted to SEK 858 M at the end of the period, compared with SEK 2,876 M at the beginning of the year. Liquid funds are placed with banks in short-term negotiable Government securities. Tobacco tax During the past 12 months, total tobacco tax and value-added tax for tobacco products paid by Swedish Match in Sweden amounted to SEK 8,810 M (9,812). Acquisitions and divestments Swedish Match sold its cigarette operations to Austria Tabak for SEK 4,800 M. The deal was approved by the Swedish Competition Authority July 21, 1999. Part of the total purchase price SEK 1,000 M was paid at the end of July. The deal is expected to be finally closed August 31, 1999. The capital gain is estimated to SEK 4,200 M and the tax on the purchase price is estimated to 1 percent. The cigarette operations will be transferred to Austria Tabak effective July 1, 1999. On July 2, 1999 Swedish Match concluded an agreement to acquire El Credito Cigars in the U.S.; the company manufactures and markets premium cigars, mainly for the American market. Its largest-selling brand is La Gloria Cubana. The acquisition includes production units with 350 employees in the Dominican Republic and in Miami, Florida. The company had sales of USD 11 M in 1998. With this company and the earlier acquisition of the "mass market" cigar operations of General Cigar, all price segments in the North American market are now being covered. El Credito is expected to be consolidated as of September 1, 1999. New organization Swedish Match has had a new organization and a new Group management since February 1, 1999. The Group has been reorganized in six divisions: North Europe, Continental Europe, North America, Overseas, Matches and Lighters. The division managers report directly to the president and are members of the Group Executive Committee. The reorganization is designed to provide a more market-oriented organization with clearly defined responsibility for results, and to link Group management directly to the operating units. The number of Group offices has been reviewed and, among other measures, it has been decided to close Swedish Match's office in Nyon, Switzerland. Average number of Group employees The Group had an average of 11,752 employees during the period, compared with 7,057 during the first half of 1998. The number during the first half of 1999 includes Wimco in India, with 4,487 employees. The average number of employees in Sweden was 1,404, compared with 1,467 a year earlier. Preparation for the year 2000 Swedish Match has worked since the beginning of 1997 to ensure that the Group's computer systems will be able to handle the transition to the new millennium without problems. A seven-step examination of slightly more than 250 systems is being conducted. As of June 30, 1999, more than 95 percent of the systems had undergone the greater part of the examination. Plans call for all systems to be tested and in production during September 1999. The view is that the Group is well prepared for the millennium. Additional information Swedish Match auditors have not reviewed this report. The interim report covering operations during the nine months ended September 30, 1999 will be released October 29, 1999. Lennart Sundén President and Chief Executive Officer Key data 12 months Full year ended June 1998 30, 1999 Operating margin, %* 19,0 18,2 Return on operating capital, 34,5 33,2 %* Return on shareholders´ 38,7 28,3 equity, % Interest coverage ratio, 6,6 7,6 times Debt/equity ratio, % 147,8 63,0 Equity/assets ratio, % 20,8 21,9 Investments in tangible 522 393 assets, MSEK Average number of employees 11,752 10,314 Share data Income per share after full tax Before items affecting 2:32 1:96 comparability, SEK After items affecting 2:10 1:59 comparability, SEK Shareholders´ equity per 4:48 5:00 share, SEK Number of shares outstanding 431 339 663 431 339 663 Income per share after full tax during the first half of 1999, 1:26 SEK (0:75) * Before items affecting comparability Consolidated Income Statement in summery MSEK Percent First six change 12 months Full year months ended 1999 1998 % June 30, 1999 1998 Sales, incl. 8,005 7,719 4 16,201 15,915 tobacco tax Less tobacco -3,565 -3,905 -9 -7,381 -7,721 tax Sales 4,440 3,814 16 8,820 8,194 Cost of goods -2,282 -1,886 21 -4,492 -4,096 sold Gross profit 2,158 1,928 12 4,328 4,098 Sales and -1,279 -1,236 4 -2,663 -2,620 administrations costs, etc. Shares in 5 6 -19 10 11 earnings of associated companies 884 698 27 1,675 1,489 Items affecting - -48 - -60 -108 comparability Operating 884 650 36 1,615 1,381 income Net interest -69 -17 -134 -82 expense Other financial 18 -13 -10 -41 items, net Items affecting - -60 - -60 comparability Net financial -51 -90 -144 -183 items Income after 833 560 49 1,471 1,198 financial items Taxes -288 -206 40 -564 -482 Minority -2 2 6 10 interests Net profit for 543 356 53 913 726 the period Consolidated Balance Sheet in summary MSEK June 30, Dec. 31, 1999 1998 Intangible fixed assets 2,363 895 Tangible fixed assets 2,263 2,239 Participation in associated companies etc. 227 184 Financial fixed assets 187 279 Current operating assets 3,971 3,774 Current financial receivables 152 315 Current investments 12 1,386 Cash and bank balances 846 1,490 Total assets 10,021 10,562 Shareholders´ equity 1,932 2,160 Minority interests 151 148 Provisions 1,116 1,165 Long-term loans 3,028 2,098 Other long-term liabilities 128 26 Short-term borrowings 909 2,233 Other current liabilities 414 340 Current operating liabilities 2,343 2,392 Total shareholders´ equity, provisions And liabilities 10,021 10,562 Operating capital 6,481 4,700 Net debt 3,079 1,455 Consolidated Cash Flow Analysis in summary MSEK Jan-June 1999 Jan-June 1998 Cash flow from operations 706 355 Investments Investments in property, plant and -283 -154 equipment Sales of property, plant and equipment 33 12 Investments in intangibles -1,486 -133 Investments in associated companies and -50 -126 acquisition of companies Changes in financial receivables etc. 189 16 Cash flow from investments -1,597 -385 Financing Changes in loans -613 840 Dividend to shareholders -474 -510 Cash flow from financing -1,087 330 Translation differences attributable to -40 -1 cash and bank balances Change in liquid funds -2,018 299 Liquid funds at January 1 2,876 563 Liquid funds at the end of the period 858 862 Quarterly data MSEK Q4/97 Q1/98 Q2/98 Q3/98 Q4/98 Q1/99 Q2/99 Sales, incl. 3,883 3,741 3,978 4,155 4,041 3,838 4,167 tobacco tax Less tobacco tax -1,998 -1,902 -2,003 -1,932 -1,884 -1,716 -1,849 Sales 1,885 1,839 1,975 2,223 2,157 2,122 2,318 Cost of goods sold -881 -894 -992 -1,162 -1,048 -1,076 -1,206 Gross income 1,004 945 983 1,061 1,109 1,046 1,112 Sales and -622 -596 -640 -669 -715 -609 -670 administrations costs, etc. Shares in earnings 3 3 3 3 2 3 2 of associated companies 385 352 346 395 396 440 444 Items affecting - - -48 - -60 - - comparability Operating income 385 352 298 395 336 440 444 Net interest -4 -4 -13 -39 -26 -24 -45 expense Other financial -18 -7 -6 -22 -6 13 5 items, net Items affecting - - -60 - - - - comparability Net financial items -22 -11 -79 -61 -32 -11 -40 Income after 363 341 219 334 304 429 404 financial items Income taxes -131 -111 -95 -118 -158 -143 -145 Minority interests 1 0 2 6 2 4 -6 Net income for the 233 230 126 222 148 290 253 period Sales by product area MSEK Q3/97 Q4/97 Q1/98 Q2/98 Q3/98 Q4/98 Q1/99 Q2/99 Chewing Tobacco 312 281 267 265 280 256 261 278 Cigarettes 414 353 328 362 401 377 350 379 Cigars 161 193 187 225 230 260 224 370 Lighters 210 187 196 184 177 178 165 173 Matches 297 350 324 343 473 433 448 401 Pipe Tobacco 44 44 48 57 55 58 55 53 Snuff 281 293 295 330 346 366 376 402 Other operations 235 184 194 209 261 229 243 262 Total 1,954 1,885 1,839 1,975 2,223 2,157 2,122 2,318 Operating income by product area MSEK Q3/97 Q4/97 Q1/98 Q2/98 Q3/98 Q4/98 Q1/99 Q2/99 Chewing Tobacco 123 100 86 94 73 78 75 71 Cigarettes 175 124 92 92 141 113 127 128 Cigars 39 35 31 32 32 22 39 57 Lighters 16 14 14 3 -3 4 2 -8 Matches 40 38 30 35 28 41 29 34 Pipe Tobacco 9 5 12 9 8 9 17 11 Snuff 138 152 149 152 182 158 193 178 Other operations -80 -83 -62 -71 -66 -29 -42 -27 Subtotal 460 385 352 346 395 396 440 444 Items affecting - - - -48 - -60 - - comparability Total 460 385 352 298 395 336 440 444 *** Swedish Match is an international group with its head office in Stockholm. The company produces an extensive range of tobacco products, matches and disposable lighters. The products are sold in 140 countries. The company's total sales during 1998 amounted to approximately MSEK 8,200. The Swedish Match share is listed on the Stockholm Stock Exchange (SWMA) and Nasdaq (SWMAY). *** For further information please contact: Lennart Sundén, President & Chief Executive Officer Office +46 8 658 01 75 Sven Hindrikes, Senior Vice President & Chief Financial Officer Office +46 8 658 02 82 Bo Aulin, Senior Vice President, Corporate Affairs Office +46 8 658 03 64 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/07/27/19990727BIT00110/bit0001.doc The full report http://www.bit.se/bitonline/1999/07/27/19990727BIT00110/bit0002.pdf The full report