Swedish Match Interim Report January-September 1999

Interim Report January - September 1999 * Sales increased 14 percent to SEK 6,858 M * Operating income increased by 60 percent to SEK 407 M in the third quarter (excluding Cigarettes) * Income before taxes, including capital gain of SEK 4,102 M, rose by SEK 4,436 M to SEK 5,330 M * Strong increase in sales and earnings for Snuff and Cigars * All product areas improved operating income in the third quarter compared with prior year. * Sustained cost reductions have been achieved * Acquisitions will add annual sales of SEK 1,200 M In line with the new strategy of focusing on smokeless tobacco, cigars and pipe tobacco, the Group has been restructured during the first nine months of the year. -The cigarette business was sold for SEK 4,800 M, resulting in a capital gain of SEK 4,102 M. -Cigar operations in both the mass-market and premium segments have been acquired in the United States. These acquisitions are contributing SEK 850 M in annual sales. -The snuff and pipe tobacco company Dingler in South Africa with annual sales of SEK 360 M has been acquired after the close of the period. -A more cost-efficient management structure has been implemented. The Group balance sheet has been strengthened substantially. The equity/assets ratio has increased to 46 percent and the net debt is positive in the amount of SEK 1,746 M. Thus, the Group has substantial financial freedom of action, with the financial capacity to both make additional acquisitions and redeem or repurchase shares. Swedish Match sales during the first nine months of the year increased by 14 percent, to SEK 6,858 M (6,037), of which acquisitions accounted for 7 percent. Sales in the third quarter rose by SEK 195 M, to SEK 2,418 M. Operating income, excluding capital gain and cigarette business, increased by 35 percent, to SEK 1,036 M (767), in the nine-month period and operating income excluding the cigarette operations, increased by 60 percent, from SEK 254 M to SEK 407 M in the third quarter. Snuff is continuing to show a strong increase in volume and improvement in margins, in the North American market in particular. Operating income for the nine-month period rose by 26 percent, to SEK 607M (483). Cigars reported strong growth in both sales, up 56 percent, and operating income, up 61 percent. The strong increase was due in part to acquisitions in the U.S. and in part to organic growth, notably in Western Europe. Continuing cost reduction programs have resulted in sustained savings. The lighter plant in Lyon and a match plant in Brazil were shut down during the third quarter. Summary of Consolidated Income Statement July - September January - September MSEK 1999 1998 1999 1998 Sales 2,418 2,223 6,858 6,037 Income before items affecting 407 254 1,036 767 comparability Divested business - 141 255 326 Items affecting comparability 4,102 - 4,102 -48 Operating income 4,509 395 5,393 1,045 Net profit for the period 4,299 222 4,842 578 Sales by product area July - January - Change Oct Full September September 1998 - year MSEK 1999 1998 1999 1998 % Sept 1998 1999 Chewing Tobacco 270 280 809 812 0 1,065 1,068 Cigars 407 230 1,001 642 56 1,261 902 Lighters 170 177 508 557 -9 686 735 Matches 406 473 1,255 1,140 10 1,688 1,573 Pipe Tobacco & 100 55 208 160 30 266 218 Accessories Snuff 430 346 1,208 971 24 1,574 1,337 Other operations 635 261 1,140 664 1,369 893 Subtotal 2,418 1,822 6,129 4,946 24 7,909 6,726 Divested business - 401 729 1,091 1,106 1,468 Total 2,418 2,223 6,858 6,037 14 9,015 8,194 Operating income by product area July - January - Change Oct Full September September 1998 - year MSEK 1999 1998 1999 1998 % Sept 1998 1999 Chewing Tobacco 78 73 224 253 -11 302 331 Cigars 55 32 151 94 61 174 117 Lighters 8 -3 2 14 -85 6 18 Matches 30 28 93 94 0 133 134 Pipe Tobacco & 22 8 50 28 79 60 38 Accessories Snuff 236 182 607 483 26 765 641 Other operations -22 -66 -91 -199 -120 -228 Subtotal 407 254 1,036 767 35 1,320 1,051 Divested business - 141 255 326 367 438 Items affecting 4,102 - 4,102 -48 4,042 -108 comparability Total 4,509 395 5,393 1,045 416 5,729 1,381 Chewing Tobacco Chewing tobacco operations are conducted in the North American market, mainly in the United States. Sales in the first nine months of the year amounted to SEK 809 M (812). Stated in local currency, sales declined 4 percent. Sales in the third quarter decreased to SEK 270 M (280). The total market for chewing tobacco is continuing to decline. Swedish Match's share has increased slightly during the year. Operating income for the nine-month period fell by 11 percent, to SEK 224 M (253). Operating income in the third quarter increased to SEK 78 M (73). Cigars Swedish Match ranks second in the world in the cigar market. The largest markets are Western Europe and the United States. Sales in the first nine months of the year amounted to SEK 1,001 M (642), an increase of 56 percent. Sales in acquired companies in the U.S. accounted for SEK 299 M of the increase amounting to SEK 359 M. Sales in the Western European market rose by 9 percent. Sales in the cigar segment increased to SEK 407 M (230) in the third quarter. Operating income increased by 61 percent to SEK 151 M (94) for the nine-month period, and to SEK 55 M (32) in the third quarter, due primarily to acquisitions and organic growth. Swedish Match has acquired a significant portion of General Cigar's operations in the U.S. during the year. The acquired business comprises two production units, machinery and equipment, inventories and brand names, together with a sales force of approximately 70 people and a total of about 1,000 employees. "Garcia y Vega," "White Owl," "Tiparillos" and "Tijuana Smalls" are among the brands included in the acquisition. Integration of the business is proceeding according to plan. The acquired operation has been consolidated as of May 1. El Credito Cigars, in the United States, was acquired during the third quarter; the company manufactures and markets premium cigars, primarily for the American market. The company's largest brand is "La Gloria Cubana." The acquisition includes production units with a total of 350 employees in the Dominican Republic and in Miami, Florida. The acquisition is expected to increase Swedish Match's sales by approximately SEK 90 M. The company was consolidated as of September 1. Together with the acquisition of the cigar business from General Cigars all price segments are now covered in the North American market. Lighters Swedish Match is one of the world's largest manufacturers of disposable lighters. The largest markets are Europe, parts of Asia and the United States. Sales declined by 9 percent, to SEK 508 M (557) in the first nine months of the year, and by 4 percent, to SEK 170 M (177) during the third quarter. The decrease was due primarily to lower sales in the Russian market. Operating income decreased to SEK 2 M (14) for the first nine months of the year. During the third quarter operating income improved to SEK 8 M (-3). The improvement was attributable to lower fixed costs following restructuring. Matches Swedish Match is the only global match manufacturer. The Group's principal markets are Europe, South America and Asia. Operations also include Swedish Match Arenco, which produces machinery used to manufacture matches. Sales increased by 10 percent to SEK 1,255 M (1,140) during the nine-month period. The increase was attributable to acquisitions. Sales in the third quarter declined to SEK 406 M (473). The third-quarter sales figure in 1998 included six months' operations in Wimco in India. Operating income amounted to SEK 93 M (94) and operating income in the third quarter amounted to SEK 30 M (28). The production facility in Sao Laurenco, Brazil, was closed down during the third quarter. Some of the recently acquired units continue to show unsatisfactory profitability. A review of the production structure is now in progress. In the beginning of 1999 Swedish Match concluded an agreement to acquire a 40- percent interest in P.T. Java Match Factory, Indonesia's largest manufacturer of matches. During the third quarter an agreement was reached covering the acquisition of the remaining 40 percent of Swedish Match KAV in Turkey. Pipe Tobacco and Accessories Swedish Match is one of the world's largest producers of pipe tobacco. The principal markets are North America, Northern Europe and Western Europe. Since July 1 the sale of smoking accessories have been reported under Pipe tobacco and Accessories. Sales for the nine-month period increased 30 percent, to SEK 208 M (160). Sales in the third quarter increased to SEK 100 M (55). Operating income in the first three quarters rose to SEK 50 M (28) and to SEK 22 M (8) in the third quarter. Snuff Swedish Match is the leading manufacturer of snuff in the Nordic market and one of the four leading producers in the United States. Sales in the first nine months of 1999 increased 24 percent, to SEK 1,208 M (971). The volumes of business in the U.S. were 49 percent higher than in the preceding year and the operating margin improved substantially. The increase in volume in the Nordic market, including tax-free sales, amounted to 6 percent. Sales in the third quarter rose 24 percent, to SEK 430 M (346). Operating income in the first nine months of the year increased 26 percent, to SEK 607 M (483), and by 30 percent, to SEK 236 M (182) in the third quarter. The price of Timber Wolf, Swedish Match's leading brand in the U.S., was increased from USD 1.00 to USD 1.10 per can in September. Other Operations Other operations include the distribution of tobacco products in the Swedish market as well as Corporate overheads. A net expense of SEK 91 M was incurred compared with a net expense of SEK 199 M in the first three quarters of 1998. Sustained cost reductions have been achieved. Divested operations As of July 1, the Company's cigarette business was sold for SEK 4,800 M. After deduction of the net book value, the capital gain for Swedish Match amounted to SEK 4,102 M. The transaction was completed on August 19, 1999. Taxation of the capital gain is limited to the stamp duty, which amounts to 1 percent of the selling price. Net financial expense Net interest expense in the first nine months amounted to SEK 93 M (expense 56). The increased interest expense was attributable mainly 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 30 M (-35). Investments The Group's direct investments in tangible fixed assets amounted to SEK 334 M (203). Of the investments amounting to SEK 334 M, SEK 130 M consisted of fixed assets in connection with acquisitions of assets and liabilities and the remaining SEK 204 M pertained to replacement and efficiency-improvement investments. In addition, SEK 1,802 M (202) 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 and El Credito Cigars in the U.S. Depreciation according to plan totalled SEK 272 M (245). Investments in associated companies amounted to SEK 51 M. Financing and liquidity Liquid funds less interest-bearing liabilities at the end of the period amounted to SEK 1,746 M, an improvement of SEK 3,201 M since December 31, 1998. Cash and bank deposits, including short-term investments, amounted to SEK 5,465 M at the end of the period, compared with SEK 2,876 M at the beginning of the year. Liquid funds are primarily invested in short-term Government securities. Acquisitions Following the close of the report period Swedish Match concluded an agreement covering the acquisition of 80 percent of Leonard Dingler (Proprietary) Limited in South Africa. The company manufactures, sells and distributes tobacco products in South Africa, with 25 percent of its volume pertaining to snuff and the remainder to pipe tobacco. Annual sales amount to SEK 360 M. Swedish Match's operating income is expected to improve by more than SEK 100 M on an annual basis after deductions for amortization of acquired goodwill and brand names. The Dingler company will be consolidated in the fourth quarter. Tobacco tax In Sweden during the most recent 12-month period Swedish Match has paid tobacco taxes, plus value-added taxes on tobacco, amounting to SEK 9,074 M (9,453). 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 result in a more market-oriented structure with clearly defined responsibility for results, and to link Group management directly to the operating units. Average number of Group employees The average number of employees in the Group during the period was 11,740, compared with 9,199 in the 1998 period. The average number of employees in Sweden was 1,278, compared with 1,456 in the year-earlier period. Preparation for the year 2000 Swedish Match has been working since 1997 to ensure that the Group's computer systems will be able to handle the transition to the new millennium without problems. Slightly more than 250 systems have been checked. Virtually all systems have been subjected to final tests and are in production. The Group judges that it is well prepared for the millennium shift. Legal situation in US The uncertainty concerning the legal situation for the American cigarette industry remains, despite the settlements with the states in the so-called Medicaid cases. Swedish Match is not affected by this. The American subsidiary Pinkerton Tobacco Company has, during recent years, been named as a defendant in a number of individual product-liability cases related to the use of smokeless tobacco. None of these cases have as yet gone to trial. Additional information This report has not been reviewed by the Company's auditors. The preliminary report covering operations during full-year 1999 will be released on February 9, 2000. Lennart Sundén President and Chief Executive Officer ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/10/29/19991029BIT00500/bit0001.doc The full report http://www.bit.se/bitonline/1999/10/29/19991029BIT00500/bit0002.pdf The full report