Swedish Match: cigar margin may top expectations

  • CEO says market may be too pessimistic on cigar margins
  • Says plans to raise prices in Sweden in last week in June
  • Expects some pressure on margins for snuff
  • Credit markets improving, plans more buybacks this yr

By Mia Shanley

STOCKHOLM, June 5 (Reuters) – Swedish Match’s cigar business may be more profitable in the second quarter than analysts expect, its CEO said, after a strong first three months of the year when buyers hoarded supplies to beat a U.S. tax hike.

Lars Dahlgren, chief executive of the maker (SWMA.ST: Quote, Profile, Research), said destocking would add pressure in the second quarter but margins might not fall as sharply some feared.

“There is a risk that people are too pessimistic on the cigar numbers from the U.S. for the second quarter because we have a very strong underlying business on the mass market side,” he said in an interview.

Swedish Match, which sells products such as chewing and pipe tobacco, cigars and wet snuff, saw a sharp, one-off surge in cigar sales in the first quarter ahead of a new federal tax in the key U.S. market introduced on April 1.

The company’s operating margin for cigars — which accounted for around 28 pct of sales in 2008 — jumped to 24.3 percent in the quarter from 14.8 percent a year ago.

“Margin-wise, it’s probably going to come out stronger than previously expected for cigars,” he said, adding it was difficult to predict due to issues such as currency swings. “It’s not necessarily a given that it will be below 20 percent, despite the unwinding of the hoarding.”

However, Dahlgren — in the post for a year having been chief financial officer — added he expects some pressure on margins for snuff, a tobacco product sold mainly in the United States and Scandinavia but banned elsewhere in the European Union. It reported a 44.1 percent snuff margin in 2008 and 40.9 percent in the first quarter.

DOWNWARD RISK

“There might be a downward risk rather than an upside risk on the margin compared to last year,” he said.

Business in the United States, where Swedish Match is strong in the lower-end segment, continues to take up a greater share of the company’s business, adding pressure on the overall margin.

Dahlgren said the company will go ahead with price increases of 4 percent on average in Sweden in the last week in June, with most of the increase seen on its “value-priced” Kronan brand.

“We think that brand has become big enough and gained enough loyalty that it can support a little bit of higher pricing.”

He declined to say when the company would raise prices in the United States, stressing it was not the price leader as it is still a relatively small player there.

But he said competitors were probably considering their options and could move on prices in the autumn as they often do.

Dahlgren said Swedish Match planned to push forward with more share buybacks having bought back shares for just under 400 million Swedish crowns in the second quarter.

He said Swedish Match would probably look at issuing a new bond to extend its credit, probably with a 2016 maturity, after the summer. It recently issued a six-year 1 billion crown bond which helped it get its buyback programme back on track.

“If the credit markets continue to improve, we can start to refinance and free up cash to use for share repurchases,” he said.

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