Swedish Match Report on Operations full year 2005

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 6-K

 


 

Report of Foreign Issuer

 

Persuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

Report on Form 6-K dated February 15, 2006

 


 

Swedish Match AB

(Translation of Registrant’s Name into English)

 


 

Rosenlundsgatan 36

S-118 85 Stockholm, Sweden

(Address of Principal Executive Offices)

 


 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

 

Form 20-F      X            Form 40-F              

 

(Indicate by check whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

 

Yes                      No      X    

 

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b);82-             )

 


 

Enclosure: Swedish Match Report on Operations full year 2005

 

SIGNATURES

 

Persuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Swedish Match AB
Date: February 15, 2006  

By: /s/ Bertil Raihle


    Bertil Raihle
    Vice President Corporate Control


LOGO

 

Report on Operations full year 2005

- prepared in accordance with IFRS

 

  Fourth quarter net sales were 3,500 MSEK (3,211), and full year sales were 13,311 MSEK (13,007)

 

  Fourth quarter operating income was 678 MSEK (508) and full year operating income was 2,825 MSEK (3,593)

 

  Operating income for the full year, excluding major one-time items, was 2,618 MSEK (2,312)

 

  Net profit for the fourth quarter was 456 MSEK (297), and for the full year was 1,777 MSEK (2,084)

 

  Fourth quarter EPS was 1.47 SEK (0.86), and full year EPS was 5.61 SEK (6.18)

 

  The Board proposes an increased dividend to 2.10 SEK (1.90)

 

Sales and results for the fourth quarter

 

Swedish Match sales for the fourth quarter increased by 9 percent to 3,500 MSEK (3,211). In local currency terms sales increased by 1 percent. Excluding divested companies, sales increased by 4 percent. All product areas except matches demonstrated sales growth. Adjusted for the divestiture of the Indian company Wimco Ltd. on July 1, 2005, sales also increased for matches during the fourth quarter.

 

For snuff, sales grew by 13 percent during the fourth quarter, to 819 MSEK (726) while operating income increased by 37 percent to 392 MSEK (287). Last year’s operating income was negatively impacted by one time items of 70 MSEK. Swedish Match volumes increased in both the US and Scandinavian markets. Operating margin was 47.8 percent (39.5).

 

Sales of cigars grew by 6 percent in the fourth quarter and amounted to 834 MSEK (790), while operating income grew by 64 percent, to 176 MSEK (108). Sales in local currency terms were weaker during the fourth quarter in both Europe and the US. The increase in operating income results from both benefits of prior cost savings programs, and the fact that the fourth quarter last year was impacted with restructuring costs of 25 MSEK. Operating margin for cigars amounted to 21.1 percent (13.6).

 

Group operating income for the fourth quarter reached 678 MSEK (508). If last year’s currency rates had been used the operating income would have amounted to 616 MSEK. Costs relating to divestitures and restructurings primarily within the

 

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match business reduced operating income during the fourth quarter 2005 by 90 MSEK. Last year’s fourth quarter included restructuring costs of 125 MSEK. Operating income for the fourth quarter excluding restructuring related charges and divestments in both years grew by 21 percent, to 768 MSEK (633).

 

Operating margin for the fourth quarter amounted to 19.4 percent (15.8). Excluding restructuring charges and divestments, fourth quarter operating margin was 21.9 percent (19.7).

 

During the fourth quarter basic EPS, amounted to 1.47 SEK, compared to 0.86 SEK last year. Diluted EPS amounted to 1.46 SEK (0.86).

 

Sales and results full year 2005

 

Sales for the full year amounted to 13,311 MSEK (13,007). Excluding divested companies, sales increased by 2 percent in local currency terms. Operating income amounted to 2,825 MSEK (3,593). Last year’s operating income for the year included some larger one time items, the income of 1,521 MSEK from the settlement with UST and match impairment charges and provisions of 240 MSEK. Excluding the third quarter 2005 gain from the sale of the New York real estate and larger one time items the year before, operating income during 2005 increased by 13 percent to 2,618 MSEK (2,312).

 

Group operating margin during 2005 was 19.7 percent excluding the gain from the sale of the New York real estate. Excluding larger one time items, operating margin during last year was 17.8 percent.

 

EPS (basic) for the full year was 5.61 SEK (6.18). Diluted EPS amounted to 5.59 SEK (6.15). Excluding larger one time items earnings per share was 5.30 SEK compared to 4.19 SEK last year.

 

The Board proposes an increased dividend to 2.10 SEK (1.90).

 

Summary of Consolidated Income Statement

 

     October – December

  

Full
year

2005


  

Full
year

2004


MSEK


   2005

   2004

     

Sales

   3,500    3,211    13,311    13,007

Operating income excl. major one time items

   678    508    2,618    2,312

Operating income

   678    508    2,825    3,593

Profit before tax

   642    441    2,696    3,429

Net income incl. minority interest

   456    297    1,777    2,084

 

In this report amounts are stated in Swedish crowns rounded to the nearest million. The figures in the report are based on data from the consolidation system which are in thousands of Swedish Crowns. By rounding the figures in the report, totals may not always equal the sum of the included rounded numbers.

 

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Sales by product area

 

     October - December

  

Change

%


    Full year

  

Change

%


 

MSEK


   2005

   2004

     2005

   2004

  

Snuff

   819    726    13     3,131    3,081    2  

Chewing Tobacco

   280    237    18     1,079    1,058    2  

Cigars

   834    790    6     3,283    3,171    4  

Pipe Tobacco & Accessories

   245    242    1     920    901    2  

Matches

   355    366    (3 )   1,316    1,378    (4 )

Lighters

   166    142    17     620    582    7  

Other operations

   800    708    13     2,962    2,836    4  
    
  
  

 
  
  

Total

   3,500    3,211    9     13,311    13,007    2  
    
  
  

 
  
  

 

Operating income by product area

 

     October - December

   

Change

%


    Full year

   

Change

%


 

MSEK


   2005

    2004

      2005

    2004

   

Snuff

   392     287     37     1,504     1,376     9  

Chewing Tobacco

   100     67     48     347     304     14  

Cigars

   176     108     64     613     567     8  

Pipe Tobacco & Accessories

   60     72     (17 )   237     254     (7 )

Matches

   (31 )   15           13     (12 )      

Lighters

   1     (10 )         44     13     240  

Other operations

   (20 )   (30 )         (140 )   (190 )      
    

 

 

 

 

 

Subtotal

   678     508     33     2,618     2,312     13  

Larger one time items

                                    

Income from real estate sale

   —       —             206              

Income from settlement with UST

   —       —             —       1,521        

Match impairment charges

   —       —             —       (150 )      

Provision for acquisition of shares in Wimco Ltd

   —       —             —       (90 )      
    

 

 

 

 

 

Subtotal

   —       —             206     1,281        
    

 

 

 

 

 

Total

   678     508     33     2,825     3,593     (21 )
    

 

 

 

 

 

 

Operating margin by product area

 

     October - December

    Full year

 

Percent


   2005

    2004

    2005

   2004

 

Snuff

   47.8     39.5     48.0    44.7  

Chewing Tobacco

   35.6     28.4     32.1    28.7  

Cigars

   21.1     13.6     18.7    17.9  

Pipe Tobacco & Accessories

   24.4     29.8     25.8    28.2  

Matches

   (8.9 )   4.2     1.0    (0.9 )

Lighters

   0.4     (7.3 )   7.1    2.2  
    

 

 
  

Group*

   19.4     15.8     19.7    17.8  
    

 

 
  


* Excluding major one time items

 

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Smokeless Tobacco

 

Swedish Match has an international presence in smokeless tobacco, and sells products on most major smokeless markets. Swedish Match is a market leader in snuff in Sweden and Norway. On the largest snuff market in the world, the US, as well as in South Africa, Swedish Match has a significant position. In the US, Swedish Match is the largest manufacturer on the market for chewing tobacco. Smokeless tobacco products are increasingly recognized as having significantly lower health consequences than cigarettes. This knowledge, together with increased restrictions for cigarette smoking creates good conditions for organic growth, especially for snuff.

 

Snuff

 

Sweden is the world’s largest snuff market when it comes to per capita consumption. In Sweden, a substantially larger proportion of the male population uses snuff compared to cigarettes. The number of women using snuff is steadily increasing. The Norwegian market, which is substantially smaller than the Swedish market, is at present showing strong growth. The US is the world’s largest snuff market measured in number of cans and is approximately five times larger than the Swedish market. In Sweden and Norway, Swedish Match has the leading position. In the US, the Company is well positioned as number three on the market. Some of the best known brands include General, Ettan, and Grov in Sweden, Timberwolf in the US and Taxi in South Africa.

 

During the fourth quarter, sales increased by 13 percent versus the previous year, to 819 MSEK (726), and operating income grew by 37 percent, to 392 MSEK (287). Volumes increased in Scandinavia (1.0 percent) as well as in the US (18.0 percent), measured in number of cans. Operating margin reached 47.8 percent (39.5). Last year’s operating income was negatively impacted due to one time items of 70 MSEK.

 

Sales for the full year amounted to 3,131 MSEK (3,081), an increase of 2 percent. In Scandinavia sales volumes increased by 1 percent. In Sweden the decrease was 1 percent, while volumes in Norway as well as tax free sales increased. Loose snuff declined on the Swedish market, while sales of pouched snuff increased. The proportion of pouched snuff is currently 58 percent of the Swedish market, compared to 55 percent in December 2004. Competition on the Swedish market has increased.

 

In the US, year to date sales volumes were up by 5 percent versus previous year measured in number of cans. Sales of the Longhorn value priced brand were considerably higher than the year before, while sales for Timberwolf were lower. At the end of 2004 the Timberwolf brand was repositioned with a lower price. Swedish Match’s average market share during 2005 in the US market amounted to 9.4 percent (8.9) according to Nielsen estimates.

 

Operating income for the year amounted to 1,504 MSEK (1,376), up 9 percent. On the Nordic market operating income increased mainly due to higher volumes, improved average prices and lower costs as a result of the accomplished reorganization. In the US, sales declined due to the repositioning of the Timberwolf brand with a lower list price as well as larger part of sales attributable to the Longhorn brand. Operating margin in the US increased somewhat. Operating margin for snuff for the year was 48.0 percent (44.7).

 

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Chewing Tobacco

 

Chewing tobacco is sold primarily in the North American market, with concentration in the southern US. Well known brands include Red Man and Southern Pride. Swedish Match is the leading producer of chewing tobacco in the US, and the market share is 44 percent, according to Nielsen estimates. The chewing tobacco segment declines each year due to relatively few new consumers. Some consumers choose to use snuff instead.

 

During the fourth quarter, sales increased by 18 percent, to 280 MSEK (237), and operating income grew by 48 percent, to 100 MSEK (67). Improved average price and a stronger US dollar compensated for lower volumes. Operating margin reached 35.6 percent (28.4).

 

Sales for the full year grew by 2 percent to 1,079 MSEK (1,058), while operating income increased by 14 percent to 347 MSEK (304). Higher average price compensated for volume loss and lower costs as well as a stronger US dollar contributed to the improved operating income. Operating margin amounted to 32.1 percent (28.7).

 

Cigars and Pipe Tobacco

 

Swedish Match is one of the world’s largest operators within cigars and pipe tobacco. Organic growth opportunities are mainly within cigars, while the consumption of pipe tobacco is declining.

 

Cigars

 

Swedish Match is the second largest producer of cigars and cigarillos in sales value. Swedish Match offers a full range of different cigars and brands. Well known brands include Macanudo, La Gloria Cubana, White Owl, Garcia y Vega, La Paz, Justus van Maurik, and Wings. The US is the largest cigar market in the world and Swedish Match has a leading position in the premium segment, and is well established in the segment for machine made cigars. After the US, the most important cigar markets are in Europe, where Swedish Match is well represented in most countries, with an especially good market position in The Netherlands and Scandinavia. In Europe, machine made cigars dominate.

 

During the fourth quarter, sales increased by 6 percent, to 834 MSEK (790), and operating income increased by 64 percent, to 176 MSEK (108). Operating margin reached 21.1 percent (13.6). Unit volumes declined in both Europe and the US, and the improved operating income is mainly attributable to the effects of prior cost savings activities in the European business.

 

Sales for the full year amounted to 3,283 MSEK (3,171), an increase of 4 percent. In local currency terms sales were up 2 percent. Operating income for the full year grew by 8 percent to 613 MSEK (567). Operating margin amounted to 18.7 percent (17.9). Excluding charges of 75 MSEK related to the integration of General Cigar in 2005, and 36 MSEK regarding restructuring programs in Europe in 2004, operating income grew by 14 percent and operating margin grew to 21.0 percent (19.0). The increase in operating income is primarily due to lower costs as a result of previous restructuring measures.

 

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Pipe Tobacco and Accessories

 

Swedish Match is one of the largest pipe tobacco companies in the world and its products are marketed worldwide. The Borkum Riff brand is sold in over 60 countries. The Company has its most significant presence in South Africa, where local production takes place. Best Blend and Boxer are major brands in South Africa. Pipe tobacco consumption declines on most established markets, as the segment attracts relatively few new consumers. However, the demand is increasing in certain smaller export markets.

 

During the fourth quarter, sales grew by 1 percent, to 245 MSEK (242), and operating income declined by 17 percent, to 60 MSEK (72). Operating margin was 24.4 percent (29.8).

 

Sales for the full year amounted to 920 MSEK (901). Improved price levels and a somewhat stronger South African Rand compensated for lower volumes. Operating income was 237 MSEK (254). Operating margin amounted to 25.8 percent (28.2).

 

Lights

 

Swedish Match markets matches and lighters globally.

 

Matches

 

Swedish Match is a market leader in many markets for matches. The brands are mostly local, and have leading positions in their home countries. Major brands include Swan, Solstickan, Three Stars, and Redheads.

 

During the year, an extensive restructuring program has been completed within the match business. The match factory in Valencia, Spain has been closed and the property has been divested. Also, the decision has been made to close the match manufacturing facility in Turkey. The European match business in now concentrated in the match factory in Tidaholm, Sweden. Further, a number of units and holdings have been divested. The holding in the Indian match company Wimco Ltd. has been divested in two steps and was concluded during the fourth quarter. Wimco Ltd. is not consolidated in the Swedish Match group as per July 1. The holding in the partly owned Indonesian company Jamafac was divested during the fourth quarter. A letter of intent has been signed to sell the European advertising match business. In early 2006 the Arenco Group with manufacturing units for matches and packaging machines in Kalmar and Halmstad in Sweden and in Shanghai, China was sold.

 

The above mentioned measures have affected the year’s operating income for matches negatively by 106 MSEK, of which 75 MSEK has impacted the fourth quarter. Last year costs for restructuring of the match business amounted to 125 MSEK, of which 20 MSEK was during the fourth quarter.

 

During the fourth quarter, sales declined by 3 percent, to 355 MSEK (366). Excluding divested businesses, sales increased by 14 percent, but was flat in local currency terms. Operating income was a negative 31 MSEK (15), and excluding restructuring costs, 44 MSEK (35). Currency effects and high shipments at the end of the year have positively impacted operating income.

 

Sales for the full year amounted to 1,316 MSEK (1,378), and increased by 5 percent, excluding divested businesses. Operating income during 2005 was 13 MSEK (negative 12), and excluding restructuring costs operating income amounted to 119 MSEK (113). Operating margin amounted to 1.0 percent (negative 0.9).

 

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Lighters

 

Swedish Match produces and distributes disposable lighters and the main brand is Cricket. Swedish Match’s largest market is Russia. Several markets are faced with an intensely competitive situation from, among others, Chinese producers.

 

During the fourth quarter, sales grew by 17 percent, to 166 MSEK (142), due to higher volumes. Operating income grew to 1 MSEK (negative 10). Restructuring costs of 10 MSEK have impacted fourth quarter’s operating income this year as well as previous year. Operating margin was 0.4 percent (-7.3).

 

Sales for the full year were 620 MSEK (582), an increase of 7 percent. Volumes increased but the average price for lighters decreased. Operating income increased to 44 MSEK (13), positively impacted by increased volumes, cost savings and improved productivity. Operating margin improved to 7.1 percent (2.2).

 

Other Operations

 

Other operations include the distribution of tobacco products on the Swedish market, an Irish distribution business, sales of advertising products, as well as corporate overheads. The Irish distribution unit was divested in December and a letter of intent has been signed to sell the business for advertising products.

 

During the fourth quarter, sales amounted to 800 MSEK (708), and operating income, net, amounted to a negative 20 MSEK (negative 30). Sales in the distribution business on the Swedish market were positively impacted due to hoarding effects at the end of the quarter. Corporate overheads have increased due to work in fulfilling requirements under the Sarbanes Oxley Act, but were offset by cost reductions in other areas.

 

For the full year, operating income for other operations was a negative 140 MSEK (negative 190). Last year’s expense included charges of 44 MSEK related to both the closure of a distribution center in Sweden and severance payments and other expenses with regard to the former CEO.

 

Financing and net financial expense

 

At the close of the period the Group’s net debt amounted to 674 MSEK, as compared to 527 MSEK on December 31, 2004, an increase of 147 MSEK. Cash flow from operations was 2,718 MSEK compared with 3,626 MSEK a year ago, which included the settlement with UST. Cash flow from the business has, among other things, been used to acquire the minority shares in General Cigar of 1,100 MSEK, share repurchases of net 1,411 MSEK as well as paid dividend of 612 MSEK.

 

During the period 16,229,514 shares were repurchased, amounting to 1,434 MSEK, and sales of treasury shares related to options programs amounted to 23 MSEK.

 

During the period new bond loans of 1,685 MSEK have been issued. Amortization for the period amounted to 942 MSEK.

 

Liquid funds, including short term investments, amounted to 3,657 MSEK at the end of the period, compared with 3,002 MSEK at the beginning of the year.

 

Net interest expense for the full year amounted to a negative 106 MSEK (negative 163). Other financial items, net, amounted to an expense of 23 MSEK (negative 2).

 

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Taxes

 

Total tax for the full year amounted to 919 MSEK (1,345), corresponding to an average tax rate of 34.1 percent (39.2). The tax rate for 2005 was impacted by the estimated gain from the sale of the real estate in New York at 55 percent. The high tax rate during 2004 was due to high tax burden regarding the settlement income from UST as well as certain non deductible restructuring costs.

 

Earnings per share

 

Earnings per share for the full year amounted to 5.61 SEK (6.18). The gain from the sale of the real estate has affected EPS positively by 29 öre. Last year’s earnings per share, was positively affected by larger one time items by 1.96 SEK.

 

The Board proposes increased dividend to 2.10 SEK (1.90). The dividend then amounts to 642 MSEK based on the number of shares justified to dividend at the end of the year. Unrestricted equity in the parent company amounts to 5,402 MSEK.

 

Capital expenditure, depreciation and amortization

 

The Group’s direct investments in tangible fixed assets amounted to 328 MSEK (486). The investments include increased capacity for pouched snuff and rationalizations in the cigar operations. Sale of fixed assets amounted to 628 MSEK (42) of which the sale of General Cigars’ New York real estate was 490 MSEK. Total depreciation and amortization amounted to 458 MSEK (479), of which depreciation on tangible assets amounted to 337 MSEK (332) and amortization of intangible assets amounted to 121 MSEK (147).

 

Tobacco tax

 

During the past 12 months, total tobacco tax and value-added tax on tobacco tax paid by Swedish Match in Sweden amounted to 9,930 MSEK (9,852).

 

Average number of Group employees

 

The average number of employees in the Group during the year was 14,333 compared with 15,039 for the full year 2004. The number of employees decreased as a result of the divestment of Wimco Ltd. and rationalizations within several product areas.

 

Share structure

 

During the year 16.2 million shares were repurchased at an average price of 88.37 SEK. As at December 31, 2005 Swedish Match held 18.7 million shares in its treasury, corresponding to 5.8 percent of the total amount of shares. Total shares bought back by Swedish Match since the buyback programs started have been repurchased at an average price of 55.50 SEK. The number of shares outstanding, net after repurchase and after the sale of treasury shares, as per December 31, 2005 amounted to 305.9 million. In addition, the Company has call options issued and outstanding on its treasury shares corresponding to 4.9 million shares exercisable in gradual stages from 2006-2010.

 

During January 2006 another 5 million shares have been repurchased and consequently the Company holds 23.7 million shares in its treasury.

 

The Annual General Meeting on April 27, 2005 renewed the mandate to repurchase shares up to 10 percent of the shares of the Company. In addition, a decision was

 

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made to cancel 12.0 million shares held in treasury. Furthermore, the Annual General Meeting decided to reduce the share capital by reducing the shares’ nominal value from 2.40 SEK to 1.20 SEK and reduce the statutory reserve of the parent company by 114 MSEK. These reductions became effective on October 5 and consequently 532 MSEK were transferred from restricted equity to unrestricted equity. After the transfer to unrestricted equity, the total amount of registered shares in the Company is 324,596,181.

 

The Board will propose to the Annual General Meeting in April 2006 a renewed mandate to repurchase shares up to 10 percent of the shares of the Company. In addition a proposal will be made to cancel up to 25 million shares held in treasury with a contemporaneous bonus issue of an amount equivalent the amount of cancelled shares times 1.20 SEK. With the latter transaction the Company’s share capital will not decrease through the cancellation of shares. Also, a proposal to reduce the parent company’s statutory reserve, which amounts to 80 MSEK, through unrestricted equity will be made.

 

Other events and events after the period

 

During the second quarter, Swedish Match has acquired all outstanding shares of General Cigar and now owns 100 percent of the company. The second quarter was impacted by integration costs of 75 MSEK. Cost saving effects due to the integration is expected to impact results from 2006. During September the sale of General Cigar’s real estate in New York was concluded.

 

In February 2005, The Second Circuit Court of Appeals in New York ruled in favour of General Cigar in a lawsuit filed by Cubatabaco over trademark ownership of the Cohiba brand in the US. Cubatabaco has filed a petition to the US Supreme Court seeking review. The Supreme Court has requested a statement from the American government, but has not yet taken stand regarding leave to appeal. This case has been ongoing since 1997.

 

As previously announced, Swedish Match on July 1 sold its 74 percent holding of the Indian match company, Wimco to a subsidiary of Indian Tobacco Company (ITC). Wimco is therefore not included in Swedish Match’s consolidated numbers as per July 1. On September 29, 2005 Swedish Match acquired 16.8 percent of the total amount of outstanding shares in Wimco in an open offer as per an earlier ruling from the Securities and Exchange Board of India (SEBI). Swedish Match sold these shares in connection with ITC’s offer to buy all outstanding shares of Wimco, during the fourth quarter.

 

In January, 2006, the Company sold its Arenco subsidiary, with manufacturing units in Kalmar and Halmstad, Sweden and Shanghai, China. Arenco manufactures machines for match manufacturing and packaging. In addition to the sale of Arenco, Swedish Match has divested its distribution company in Ireland. Also the company signed a letter of intent to sell its European advertising lights and other advertising products business, which include a production facility in Hungary. Furthermore, the holding in the partly owned match company Jamafac in Indonesia has been sold.

 

9


Distribution of surplus funds

 

Dividend

 

Swedish Match’s dividend policy is that the dividend should largely follow the trend of the Group’s net income. When establishing a dividend, the size of planned repurchases of shares is also taken into account. It is estimated that the dividend amount will be between 30-50 percent of net income for the year.

 

Repurchase

 

A repurchase of shares is, in principle, a reverse new share issue and makes it possible to work continuously to optimize the capital structure of the balance sheet. In view of Swedish Match’s stable and positive cash flow, the position of the Board of Directors with regard to repurchase of shares is positive.

 

The size and scope of share buybacks depend, in exactly the same way as the size of the dividend, on Swedish Match’s financial position, net income, anticipated future profitability, cash flow, investments and expansion plans. Other factors that affect repurchases are the price of the shares, the Group’s interest and tax expenses, and the earnings available for distribution.

 

Financial restrictions

 

When considering the size of the surplus funds to be transferred to shareholders, it has been decided that the following restrictions should apply:

 

  The Company shall over time strive for a capital structure with an interest cover based on EBITA (profit before financial items, interest and amortization on intangible assets/net interest) that exceeds nine times.

 

  The Company shall over time strive for a net debt divided by EBITA below two.

 

Accounting principles

 

This interim report is prepared in accordance with the Accounting Standard IAS 34 Interim Financial Reporting from the International Accounting Standards Board.

 

New accounting principles 2005

 

Obligations for retirement pension and family pension for salaried personnel and workers covered by a collective agreement in Sweden is secured through insurance in a superannuation fund (PSF). This fund also covers other employers outside the Swedish Match group. When the Company has not had access to the requisite information to report this plan as a defined-benefit plan it has been reported as a defined-contribution plan. During the year an analysis has been made which has made it possible to do a reasonable estimate of Swedish Match’s assets and liabilities in the plan. For the full year 2005 report this plan is reported as a defined-benefit plan. The change is reported as a change of accounting principles as of January 1, 2004 and previously reported periods, 2004 and 2005, have been restated. The change implies that the opening shareholder’s equity as per January 1, 2004 increased by 40 MSEK and that the pensions costs during 2004 and 2005 are reported with a lower amount of 32 MSEK and 38 MSEK respectively.

 

As of January 1, 2005 Swedish Match changed its accounting principles for the preparation of financial statements to comply with International Financial Reporting Standards (IFRS). Previously the financial statements were prepared in accordance with Swedish Generally Accepted Accounting Principles (“Swedish GAAP”).

 

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The financial statements for periods beginning on or after January 1, 2005 are therefore prepared in accordance with IFRS. IFRS has also been retrospectively applied to year 2004 comparable data but with the exception of the reporting of financial instruments (IAS 32 and IAS 39) and share-based payments (IFRS 2). The financial instruments and share-based payments have not been restated as Swedish Match does not fall under the retrospective reporting requirements for these standards.

 

The financial statements are from January 1, 2005, set up as specified in IAS 1. The main implication of applying IAS 1, is that net income, on the face of the income statement, and equity, on the face of balance sheet, are presented including the minority’s interest.

 

For Swedish Match, the transition to IFRS has changed the reporting of biological assets (IAS 41), goodwill (IFRS 3 and IAS 38), financial instruments (IAS 32 and IAS 39) and share-based payments (IFRS 2). The accounting principles for employee benefits (IAS 19) were already adopted on January 1, 2004 under Swedish GAAP and therefore Swedish Match’s financial statements already complied with IAS 19 in 2004.

 

Goodwill and biological assets

 

Information on changes in accounting principles for biological assets (IAS 41) and goodwill (IFRS 3 and IAS 38), due to the transition to IFRS, is included in the report of operations for 2004 and the annual report for 2004.

 

Financial instruments

 

The rules for reporting of financial instruments, IAS 39, imply that financial assets and liabilities, including all derivatives, shall be measured at fair value or amortized cost depending on classification of the asset and liability. The gain or loss from a change in the value of a financial asset or liability shall be recognized, depending on classification, in profit or loss or directly in equity until realized.

 

According to IAS 39, companies can apply hedge accounting. Under hedge accounting, a company shall link a balance sheet item to a designated hedging instrument. To qualify for hedge accounting under IAS 39, the hedging relationship has to satisfy strict requirements.

 

The major portion of the Group’s borrowing was originally assumed at a fixed interest rate but subsequently converted to a floating rate by means of interest rate swaps. Swedish Match has decided to apply hedge accounting on interest rate swaps that can be linked to the original borrowing.

 

All other financial instruments within Swedish Match will be subject to fair value accounting and the gain or loss from change in value will be recognized in the profit and loss.

 

At transition to IFRS, the difference between the fair values or amortized costs of the financial assets and liabilities and the values reported according to Swedish GAAP was recognized directly in equity. Any initial recognition of derivatives not previously recognized was also reported directly in equity. At January 1, 2005, an increase in equity of 31 MSEK was thereby reported. The reporting in accordance with IAS 39 has resulted in a negative effect on net income by 10 MSEK during full year 2005.

 

Share-based payments

 

The rules for reporting of share-based payments (such as Swedish Match’s option program), IFRS2, imply that an assessed fair value of the options shall be expensed during a vesting period or at a vesting date. During full year 2005, net income has been negatively affected by 10 MSEK due to reporting in accordance with IFRS 2.

 

11


Outlook for 2006

 

Our focus on product development and productivity improvements during the last two years has established a solid ground for a profitable growth where focus will be on organic growth for snus and cigars.

 

Our Company consists of loyal and competent employees throughout the world. This makes me look at the future with confidence that we can continue to improve shareholder value in the coming years with continued investments in our four building stones in the strategy: organic growth, complementary acquisitions, productivity improvements and a continued optimization of the balance sheet.

 

Additional information

 

The Annual General Meeting will be held in Stockholm on April 20, 2006. The Annual Report is expected to be released and distributed in mid March. The first quarter 2006 report will be released April 28.

 

Stockholm, February 15, 2006

 

/s/ Sven Hindrikes


Sven Hindrikes
President and Chief Executive Officer

 

12


Key data

 

    

Full year

2005


  

Full year

2004


Operating margin, %1)

   19.7    17.8

Operating capital, MSEK

   7,765    7,314

Return on operating capital, %1)

   34.7    29.4

Return on shareholders’ equity, %

   36.6    48.2

Net debt, MSEK2)

   674    527

Net debt/equity ratio, %

   13.3    10.4

Equity/assets ratio, %

   30.2    34.0

Investments in tangible assets, MSEK

   328    486

EBITDA, MSEK3)

   3,206    2,916

EBITA, MSEK4)

   2,807    2,496

EBITA interest cover

   26.6    15.4

Net debt/EBITA

   0.2    0.2

Share data5)

         

Earnings per share, SEK

         

Basic

   5.61    6.18

Diluted

   5.59    6.15

Excluding major one time items, diluted

   5.30    4.19

Excluding amortization and major one time items, diluted

   5.61    4.54

Shareholders’ equity per share, SEK

   16.60    14.24

Number of shares outstanding at end of period

   305,901,281    321,516,893

Average number of shares outstanding

   315,128,554    325,708,645

Average number of shares outstanding, diluted

   316,226,392    327,013,542

1) Excluding major one time items
2) Pension liabilities are not included in net debt
3) Operating income excluding major one time items adjusted for depreciation, amortization and writedowns
4) Operating income excluding major one time items adjusted for amortization and writedowns of intangible assets
5) Net income attributable to Swedish Match equity holders

 

Consolidated Income Statement in summary

 

     Oct – Dec

   

Change

%


  

Full year

2005


   

Full year

2004


   

Change

%


 

MSEK


   2005

    2004

          

Sales, including tobacco tax

   5,876     5,343          22,120     21,705        

Less tobacco tax

   (2,376 )   (2,132 )        (8,809 )   (8,698 )      
    

 

 
  

 

 

Sales

   3,500     3,211     9    13,311     13,007     2  

Cost of goods sold

   (1,959 )   (1,844 )        (7,278 )   (7,246 )a)      
    

 

 
  

 

 

Gross profit

   1,540     1,367     13    6,033     5,761     5  

Sales and administrative expenses

   (869 )   (861 )        (3,226 )c)   (3,690 )b)      

Shares in earnings of associated co.

   5     2          18     1        
    

 

 
  

 

 

     678     508     33    2,825     2,072     36  

Settlement income

   0     0          0     1,521        
    

 

 
  

 

 

Operating income

   678     508     33    2,825     3,593     (21 )

Net interest expense

   (22 )   (50 )        (106 )   (163 )      

Other financial items, net

   (14 )   (17 )        (23 )   (2 )      
    

 

 
  

 

 

Net financial items

   (36 )   (67 )        (128 )   (164 )      
    

 

 
  

 

 

Profit before taxes

   642     441     46    2,696     3,429     (21 )

Taxes

   (186 )   (145 )        (919 )   (1,345 )      

Net income for the period

   456     297     54    1,777     2,084     (15 )
    

 

 
  

 

 

Attributable to:

                                   

Swedish Match equity holders

   456     273          1,769     2,011        

Minority interests

   0     23          9     72        
    

 

 
  

 

 

Net income for the period

   456     297     54    1,777     2,084     (15 )
    

 

 
  

 

 

Earnings per share, basic, SEK

   1.47     0.86          5.61     6.18        

Earnings per share, diluted, SEK

   1.46     0.86          5.59     6.15        
    

 

 
  

 

 


a) Including impairment charge in match operations of 150 MSEK
b) Including provisions for acquisition of shares in Wimco Ltd. of 90 MSEK
c) Including income from sale of real estate of 206 MSEK

 

13


Consolidated Balance Sheet in summary

 

MSEK


   Dec 31, 2005

    Dec 31, 2004

 

Intangible fixed assets

   4,265     3,452  

Tangible fixed assets

   2,488     2,712  

Financial fixed assets

   1,150     848  

Current operating assets

   5,245     4,884  

Short-term investments

   1,929     1,815  

Cash and bank

   1,729     1,187  
    

 

Total assets

   16,806     14,898  
    

 

Swedish Match equity holders

   5,079     4,579  

Minority interests

   3     481  
    

 

Total equity

   5,083     5,060  

Long-term provisions

   3,072     2,512  

Long-term loans

   2,867     2,559  

Other long-term liabilities

   17     21  

Short-term provisions

   293     647  

Short-term loans

   1,464     970  

Other current liabilities

   4,010     3,129  
    

 

Total shareholders’ equity, provisions and liabilities

   16,806     14,898  
    

 

Consolidated Cash Flow Statement in summary             

MSEK


   Full year
2005


    Full year
2004


 

Income after financial items

   2,696     3,429  

Non-cash items and taxes paid

   (283 )   (140 )

Cash flow from operations before changes in Working Capital

   2,413     3,289  

Cash flow from changes of Working Capital

   305     337  
    

 

Cash flow from operations

   2,718     3,626  

Investments

            

Investments in property, plant and equipment

   (328 )   (486 )

Sales of property, plant and equipment

   628     42  

Investments in intangibles

   —       (34 )

Investments in consolidated companies

   —       (53 )

Payment of minority shares in General Cigar

   (1,100 )   —    

Investments in other companies

   (92 )   (10 )

Divestment of business operations

   184     117  

Changes in financial receivables etc.

   (44 )   (47 )

Changes in short-term investments1)

   (113 )   (646 )
    

 

Cash flow from investments

   (865 )   (1,118 )

Financing

            

Changes in loans

   743     (1,819 )

Dividend

   (612 )   (558 )

Dividend paid to minority in subsidiaries

   —       (121 )

Repurchase of own shares

   (1,434 )   (658 )

Sale of treasury shares

   23     82  

Other

   (162 )   295  
    

 

Cash flow from financing

   (1,441 )   (2,779 )

Cash flow for the period

   412     (270 )

Cash and bank at the beginning of the period

   1,187     1,497  

Translation difference attributable to cash and bank

   130     (40 )
    

 

Cash and bank at the end of the period

   1,729     1,187  
    

 


1) Refers to investments in short term securities as part of the cash management activities. The sum of cash and bank and short-term investments amounted to 3,657 MSEK at the end of the period compared to 3,002 MSEK at the end of 2004.

 

14


Change in Shareholders’ equity

 

MSEK


   Full year 2005

    Full year 2004

 
   Swedish
Match
equity
holders


    Minority
interest


    Total
equity


    Swedish
Match
equity
holders


    Minority
interest


    Total
equity


 

Opening balance as per Dec 31

   4,579     481     5,060     3,758     604     4,362  

New accounting principle, PSF

                     40           40  

New accounting principle, financial instrument, (IAS 39)

   31     17     48                    

Repurchase of own shares

   (1,434 )         (1,434 )   (658 )         (658 )

Sale of treasury shares

   23           23     82           82  

Dividend paid

   (612 )         (612 )   (558 )         (558 )

Dividend paid to minority in subsidiaries

                           (121 )   (121 )

Acquisition of minority shares in Best Blend

                           (16 )   (16 )

Acquisition of minority shares in General Cigar

         (532 )   (532 )                  

Divestment of shares in Wimco

         (6 )   (6 )                  

Fair value reserve IAS 39 etc.

   17           17                    

Translation difference for the period

   707     34     741     (96 )   (58 )   (154 )

Net income for the period

   1,769     9     1,777     2,011     72     2,084  
    

 

 

 

 

 

Closing balance at end of period

   5,079     3     5,083     4,579     481     5,060  
    

 

 

 

 

 

 

Quarterly data

 

MSEK


   Q1/04

    Q2/04

    Q3/04

    Q4/04

    Q1/05

    Q2/05

    Q3/05

    Q4/05

 

Sales, including tobacco tax

   4,973     5,628     5,761     5,343     4,886     5,604     5,754     5,876  

Less tobacco tax

   (1,971 )   (2,252 )   (2,342 )   (2,132 )   (1,918 )   (2,220 )   (2,294 )   (2,376 )
    

 

 

 

 

 

 

 

Sales

   3,002     3,376     3,419     3,211     2,967     3,384     3,461     3,500  

Cost of goods sold

   (1,585 )   (1,864 )   (1,804 )   (1,843 )   (1,629 )   (1,842 )   (1,848 )   (1,959 )
    

 

 

 

 

 

 

 

Gross profit

   1,417     1,512     1,615     1,367     1,338     1,542     1,612     1,540  

Sales and administrative expenses

   (901 )   (925 )   (913 )   (861 )   (802 )   (901 )   (860 )   (869 )

Shares in earnings of associated co.

   (1 )   0     (1 )   2     2     6     4     5  
    

 

 

 

 

 

 

 

     515     587     702     508     538     647     756     678  

Income from real estate sale

   —       —       —       —       —       —       206     —    

Income from settlement with UST

   1,417     104     —       —       —       —       —       —    

Match impairment charges

   —       —       (150 )   —       —       —       —       —    

Provision for acquisition of shares in Wimco Ltd

   —       —       (90 )   —       —       —       —       —    
    

 

 

 

 

 

 

 

Operating income

   1,932     691     462     508     538     647     962     678  

Net interest expense

   (42 )   (39 )   (32 )   (50 )   (18 )   (33 )   (33 )   (22 )

Other financial items, net

   (4 )   12     8     (17 )   (2 )   0     (7 )   (14 )
    

 

 

 

 

 

 

 

Net financial items

   (47 )   (27 )   (24 )   (67 )   (20 )   (33 )   (40 )   (36 )
    

 

 

 

 

 

 

 

Profit before tax

   1,886     664     438     441     518     614     922     642  

Income taxes

   (740 )   (247 )   (213 )   (145 )   (172 )   (209 )   (353 )   (186 )
    

 

 

 

 

 

 

 

Net income for the period

   1,146     417     225     297     347     405     569     456  
    

 

 

 

 

 

 

 

Attributable to:

                                                

Swedish Match equity holders

   1,136     397     206     273     340     404     569     456  

Minority interests

   10     20     19     23     7     2     0     0  
    

 

 

 

 

 

 

 

Net income for the period

   1,146     417     225     297     347     405     569     456  
    

 

 

 

 

 

 

 

 

15


Sales by product area

 

MSEK


   Q1/04

    Q2/04

    Q3/04

    Q4/04

    Q1/05

    Q2/05

    Q3/05

    Q4/05

 

Snuff

   751     814     791     726     703     800     809     819  

Chewing Tobacco

   254     282     285     237     242     267     290     280  

Cigars

   687     846     848     790     734     841     874     834  

Pipe Tobacco & Accessories

   211     214     234     242     216     218     241     245  

Matches

   324     340     348     366     294     369     298     355  

Lighters

   146     146     147     142     143     155     156     166  

Other operations

   628     734     766     708     635     734     792     800  
    

 

 

 

 

 

 

 

Total

   3,002     3,376     3,419     3,211     2,967     3,384     3,461     3,500  
    

 

 

 

 

 

 

 

Operating income by product area                                                 

MSEK


   Q1/04

    Q2/04

    Q3/04

    Q4/04

    Q1/05

    Q2/05

    Q3/05

    Q4/05

 

Snuff

   354     365     371     287     324     388     401     392  

Chewing Tobacco

   73     82     82     67     69     83     94     100  

Cigars

   129     156     174     108     136     112     188     176  

Pipe Tobacco & Accessories

   60     53     69     72     60     56     62     60  

Matches

   (19 )   (37 )   28     15     (17 )   30     31     (31 )

Lighters

   8     9     6     (10 )   12     15     16     1  

Other operations

   (90 )   (40 )   (30 )   (30 )   (47 )   (37 )   (37 )   (20 )
    

 

 

 

 

 

 

 

Subtotal

   515     587     702     508     538     647     756     678  

Major one time items

                                                

Income from real estate sale

   —       —       —       —       —       —       206     —    

Income from settlement with UST

   1,417     104     —       —       —       —       —       —    

Match impairment charges

   —       —       (150 )   —       —       —       —       —    

Provision for acquisition of shares in Wimco Ltd.

   —       —       (90 )   —       —       —       —       —    
    

 

 

 

 

 

 

 

Subtotal

   1,417     104     (240 )   —       —       —       206     —    
    

 

 

 

 

 

 

 

Total

   1,932     691     462     508     538     647     962     678  
    

 

 

 

 

 

 

 

Operating margin by product area                                                 

Percent


   Q1/04

    Q2/04

    Q3/04

    Q4/04

    Q1/05

    Q2/05

    Q3/05

    Q4/05

 

Snuff

   47.1     44.8     46.9     39.5     46.0     48.5     49.5     47.8  

Chewing Tobacco

   28.7     29.0     28.8     28.4     28.6     31.2     32.5     35.6  

Cigars

   18.8     18.5     20.6     13.6     18.6     13.3     21.5     21.1  

Pipe Tobacco & Accessories

   28.4     24.6     29.7     29.8     27.6     25.6     25.7     24.4  

Matches

   (5.7 )   (11.0 )   8.1     4.2     (5.6 )   8.2     10.5     (8.9 )

Lighters

   5.7     5.9     4.4     (7.3 )   8.6     9.8     10.4     0.4  
    

 

 

 

 

 

 

 

Group*

   17.2     17.4     20.5     15.8     18.1     19.1     21.9     19.4  
    

 

 

 

 

 

 

 


* Excluding major one time items

 

16


Comparison of financial statements according to Swedish GAAP and IFRS

 

In the tables below, the financial statements for the fourth quarter 2004 according to Swedish GAAP is accompanied with the restated financial statements according to IFRS as well as the reconciliation between the two.

 

A reconciliation of the full year 2004 financial statements according to Swedish GAAP and IFRS are presented in the fourth quarter interim report and annual report for year 2004.

 

Consolidated adjusted closing balance per Dec 31, 2004 in summary

 

MSEK


   Reported
Dec 31,
2004


   Goodwill
IAS 38


   Biological
assets
IAS 41


   IFRS
Dec 31,
2004


Intangible fixed assets

   3,285    167         3,452

Tangible fixed assets

   2,690         22    2,712

Financial fixed assets

   848              848

Current operating assets

   4,884              4,884

Short-term investment

   1,815              1,815

Cash and bank

   1,187              1,187
    
  
  
  

Total assets

   14,709    167    22    14,898
    
  
  
  

Swedish Match equity holders

   4,421    143    15    4,579

Minority interests

   473    7    1    481
    
  
  
  

Total equity

   4,894    150    16    5,060

Provisions

   3,136    16    6    3,159

Long-term loans

   2,559              2,559

Other long-term liabilities

   21              21

Short-term loans

   970              970

Other current liabilities

   3,129              3,129
    
  
  
  

Total shareholders’ equity, provisions and liabilities

   14,709    167    22    14,898
    
  
  
  

 

17


Consolidated Income Statement January – December, 2004 in summary

 

MSEK


   Reported
Oct-Dec
2004


    Goodwill
IAS 38


    Biological
assets
IAS 41


    IFRS
Oct-Dec
2004


    Reported
Jan-Dec
2004


    Goodwill
IAS 38


    Biological
assets
IAS 41


    IFRS
Jan-Dec
2004


 

Sales, including tobacco tax

   5,343                 5,343     21,705                 21,705  

Less tobacco tax

   (2,132 )               (2,132 )   (8,698 )               (8,698 )
    

 

 

 

 

 

 

 

Sales

   3,211                 3,211     13,007                 13,007  

Cost of goods sold

   (1,841 )         (3 )   (1,843 )   (7,262 )         15     (7,247 )
    

 

 

 

 

 

 

 

Gross profit

   1,369           (3 )   1,367     5,745           15     5,760  

Sales and administrative expenses

   (825 )               (825 )   (3,542 )               (3,542 )

Amortization, intangible assets

   (79 )   43           (37 )   (323 )   175           (147 )

Shares in earnings of associated companies

   2                 2     1                 1  
    

 

 

 

 

 

 

 

     468     43     (3 )   508     1,882     175     15     2,072  

Settlement income

   0                 0     1,521                 1,521  
    

 

 

 

 

 

 

 

Operating income

   468     43     (3 )   508     3,403     175     15     3,593  

Net interest expense

   (50 )               (50 )   (163 )               (163 )

Other financial items, net

   (17 )               (17 )   (2 )               (2 )
    

 

 

 

 

 

 

 

Net financial items

   (67 )               (67 )   (164 )               (164 )
    

 

 

 

 

 

 

 

Profit before taxes

   401     43     (3 )   441     3,238     175     15     3,429  

Taxes

   (141 )   (4 )   1     (145 )   (1,323 )   (18 )   (4 )   (1,345 )
    

 

 

 

 

 

 

 

Net income for the period

   260     39     (2 )   297     1,915     157     11     2,084  
    

 

 

 

 

 

 

 

Attributable to:

                                                

Swedish Match equity holders

   239     37     (2 )   273     1,852     149     10     2,011  

Minority interests

   21     2     0     23     64     8     1     72  
    

 

 

 

 

 

 

 

Net income for the period

   260     39     (2 )   297     1,915     157     11     2,084  
    

 

 

 

 

 

 

 

Earnings per share, basic, SEK

   0.75                 0.86     5.68                 6.18  

Earnings per share, diluted, SEK

   0.75                 0.86     5.66                 6.15  
    

 

 

 

 

 

 

 

 


 

Swedish Match AB (publ), SE-118 85 Stockholm

Visiting address: Rosenlundsgatan 36, Telephone: 08 658 02 00

Corporate Identity Number: 556015-0756

www.swedishmatch.com

 


 

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