Swedish Match : Interim Report January-June 2022

Q2 2022

Half Year Report

January - June 2022

Highlights for the second quarter

• Group sales and operating profit increased strongly on the back of continued solid momentum for the US smokefree business and currency tailwind.
• Group sales increased by 23 percent to 5,561 MSEK (4,505). In local currencies, Group sales increased by 11 percent for the second quarter.
• Group operating profit increased to 2,227 MSEK (1,956).
• Operating profit from product segments increased by 14 percent to 2,271 MSEK (1,988). In local currencies, operating profit from product segments1) increased by 1 percent for the second quarter.
• In local currencies, operating profit grew by 14 percent for the Smokefree product segment despite higher market investments across geographies to support future growth. For the Cigars product segment, operating profit declined, impacted by lower volumes. For Lights, underlying operating profit increased, but items of temporary nature drove a decline in reported operating profit.
• Profit after tax increased to 1,624 MSEK (1,441).
• Earnings per share increased by 17 percent to 1.07 SEK (0.92).
• The full year outlook for 2022, found on page 14, has been updated based on developments during the first six months.
• 1. Excludes Other operations and larger one-time items.

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January-June 2022

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CEO Lars Dahlgren comments:

Another quarter with progress towards our Vision

The second quarter continued to demonstrate the attractive prospects of our business in several ways. Our smokefree business delivered double-digit revenue growth in local currencies and outstanding results despite significant investments to support future growth. The key contributor to the enhanced earnings for Smokefree was the solid performance for ZYN in the US, but moist snuff in the US also delivered respectable profit growth.

The continued impressive volume trajectory for ZYN in the US resulted, once again, from the combination of increased velocities and an expansion of the store base - in the west where the product was initially launched, as well as in expansion markets outside the west. We are further encouraged by the market share resilience of ZYN in the current competitive environment. We continued to increase our investments in brand-building, but our consumer price promotions were less pronounced in the second quarter compared to the first. Despite this, ZYN's volume market share, according to MSA data, held up well versus the first quarter and remained above the level recorded in the second quarter of the prior year. The strength of the ZYN franchise is even better reflected by the market share in retail value terms. According to IRI data, ZYN represented more than three quarters of the retail sales value of the US nicotine pouch category during the second quarter.

In Scandinavia, the smokefree category is exhibiting double-digit growth in volume terms, and what is particularly encouraging is the fact that while the accelerated category growth is being driven by increased penetration and consumption of nicotine pouches, snus consumption has also held up well. Swedish Match's market share is significantly higher within snus in Scandinavia, but important steps have been taken and will continue to be taken to improve our position within the nicotine pouch market. During the quarter we introduced several innovative new nicotine pouch offerings and product enhancements. We are particularly excited about the introduction of the patent-pending PEARLS technology, with the VOLT brand in Sweden being the first to benefit from extensions based on this exciting innovation. While still early to draw conclusions, initial interest from consumers and the trade has been strong and the VOLT brand range continued to gain share in Sweden during the quarter. Our smokefree volumes and sales in Scandinavia both grew by 6 percent compared to the prior year's second quarter, while operating profit declined, reflecting the higher market

investments, product cost inflation, as well as negative channel mix effects.

Our cigar business has faced operational challenges for some time, and while shipment volumes and the operating profit were well below the prior year second quarter, we are hopeful that we will be able to deliver improvements going forward. Our supply chain organization has made good progress in production levels of natural leaf varieties, and though demand in the overall cigar category was notably lower than prior year's elevated level, we are encouraged by our share gains within the more attractive natural leaf segment, resulting in Swedish Match regaining the number two position in the US mass market cigar category (excluding little cigars), according to MSA data. For HTL cigars, limitations of certain input materials hampered our ability to fulfill demand, but our expectation is that we will be able to increase HTL output to some extent going forward. From a financial perspective, Cigars reported relatively steep earnings contraction as the adverse effects from lower sales were aggravated by inflationary cost pressures.

The war in Ukraine is truly tragic and our hearts go out to those suffering from this senseless invasion. We have suspended our lighter sales to Russia which weighed on our results for Lights, but on an underlying basis (also adjusting for significant income of a temporary nature in the prior year period), our Lights business continued to deliver a solid result despite increasingly challenging market conditions.

During the quarter, our Board of Directors issued its recommendation to shareholders to accept the public cash offer by Philip Morris International. My focus continues to be on ensuring that our business grows stronger and plays a leading role in shaping a future in line with our vision of A World Without Cigarettes.

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January-June 2022

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Summary of consolidated income statement

MSEK	April-June	Chg	January-June	Chg	Full year
	2022	2021	%	2022	2021	%	2021
Sales	5,561	4,505	23	10,454	8,960	17	18,489
Sales from product segments1)	5,461	4,414	24	10,268	8,791	17	18,145
Operating profit from product segments1)	2,271	1,988	14	4,386	4,080	7	8,136
Operating profit, excl. larger one-time items2)	2,227	1,956	14	4,251	4,011	6	7,986
Operating profit	2,227	1,956	14	4,251	4,310	-1	8,286
Profit before income tax	2,145	1,871	15	4,082	4,136	-1	7,941
Profit for the period	1,624	1,441	13	3,117	3,221	-3	6,218
Operating margin from product segments, %1)	41.6	45.0		42.7	46.4		44.8
Earnings per share, basic and diluted, SEK	1.07	0.92		2.04	2.04		3.97
Adjusted earnings per share, basic and diluted,
SEK2)3)	1.07	0.92		2.04	1.89		3.82

1. Excluding Other operations and larger one-time items.
2. Excluding a larger one-time item during the first quarter 2021, relating to a settlement income of 300 MSEK.
3. Adjusted earnings per share in 2021 excludes settlement income of 300 MSEK (238 MSEK net of tax) recognized in the first quarter 2021.

The second quarter

(Note: Comments below refer to the comparison between the second quarter 2022 vs. the second quarter 2021).

Sales

Group sales increased by 23 percent to 5,561 MSEK (4,505) and sales from product segments increased by 24 percent to 5,461 MSEK (4,414). In local currencies, sales from product segments increased by 11 percent with increased sales for the Smokefree and Lights product segments, while sales for Cigars declined. Currency translation positively affected the comparability of sales from product segments by 571 MSEK.

Earnings

Group operating profit amounted to 2,227 MSEK (1,956). Operating profit from product segments increased by 14 percent to 2,271 MSEK (1,988). In local currencies, operating profit from product segments was up by 1 percent. On a constant currency basis, operating profit increased by 14 percent for the Smokefree segment while earnings were down for the Cigars and Lights segments. Currency translation has positively impacted the comparison of the operating profit from product segments by 256 MSEK.

Net finance costs and tax

The Group's net finance cost improved slightly to 83 MSEK (85) reflecting higher financial returns on surplus cash and decreased average debt levels. The income tax expense amounted to 521 MSEK (430), corresponding to a corporate tax rate of 24.3 percent (23.0)

Profit

The Group's profit for the period amounted to 1,624 MSEK (1,441).

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January-June 2022

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The first six months

(Note: Comments below refer to the comparison between the first six months 2022 vs. the first six months 2021).

Sales

Group sales and sales from product segments increased by 17 percent to 10,454 MSEK (8,960) and 10,268 MSEK (8,791), respectively. In local currencies, sales from product segments increased by 6 percent, with increased sales for the Smokefree and Lights segments, while sales for Cigars declined. Currency translation positively impacted the comparability of sales from product segments by 931 MSEK.

Earnings

Group operating profit, including larger one-time items, declined by 1 percent to 4,251 MSEK (4,310). The prior year period included a settlement income of 300 MSEK relating to a previously ongoing arbitration. Operating profit from product segments increased by 7 percent to 4,386 MSEK (4,080). In local currencies, operating profit from product segments was down by 3 percent. Currency translation has positively impacted the comparison of the operating profit by 428 MSEK.

Net finance costs and tax

The Group's net finance cost decreased to 169 MSEK (174) on higher financial returns on surplus cash, lower average debt levels, and the prior year period being affected by costs for early repayment of short-term bond loans. Income tax expense amounted to 965 MSEK (915), corresponding to a tax rate of 23.6 percent (22.1). The increase in the tax rate is principally due to a stronger USD along with continued strong earnings growth in the US, as well as a revaluation of deferred state tax liabilities in the US in the prior year period. When adjusted for associated companies and non-recurring items the underlying tax rate was 23.7 percent (22.9).

Profit and earnings per share

The Group's profit for the period amounted to 3,117 MSEK (3,221). Earnings per share for the first six months amounted to 2.04 SEK (2.04). Adjusted earnings per share amounted to 2.04 SEK (1.89).

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January-June 2022

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Smokefree

Second quarter highlights:

• Impressive sales growth with operating profit up sharply despite increased market investments across geographies.
• For US Smokefree, continued strong momentum for ZYN was the key contributor to the strong double-digit sales and earnings growth.
• Volume growth for both nicotine pouches and snus drove increased sales in Scandinavia. Nicotine pouch portfolio strengthened with several innovative product introductions and enhancements.
• Nicotine pouches main contributor to sales growth in Other markets. Continued market investments to support future growth.

Key data

MSEK	April-June	Chg	January-June	Chg	Full year
	2022	2021	%	2022	2021	%	2021

Sales	3,825	2,955
Operating profit	1,817	1,428
Operating margin, %	47.5	48.3
EBITDA	1,947	1,532
EBITDA margin, %	50.9	51.8
Depreciation, amortization and impairment	-130	-104
Capital expenditures	208	255

29	7,087
27	3,430
	48.4
27	3,684
	52.0
	-253
-18	410

5,778	23	12,120
2,893	19	5,998
50.1		49.5
3,093	19	6,423
53.5		53.0
-200		-425
501	-18	1,000

The second quarter

(Note: Comments below refer to the comparison between the second quarter 2022 vs. the second quarter 2021).

Sales and earnings

In local currencies, sales for the Smokefree product segment increased by 17 percent. Currency translation positively impacted the sales comparison by 358 MSEK.

Operating profit in local currencies increased by 14 percent with positive currency translation effects amounting to 189 MSEK. The increases in sales and operating profit were driven by the US smokefree business and especially the continued momentum for ZYN nicotine pouches.

In Scandinavia, sales increased driven by strong volume development, while operating profit declined as a result of elevated brand investments and higher production costs.

In Other markets, sales grew, driven by the development for nicotine pouches.

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January-June 2022

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