Swedish Match : Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

SWMA.ST - Q4 2021 Swedish Match AB Earnings Call

EVENT DATE/TIME: FEBRUARY 16, 2022 / 12:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

FEBRUARY 16, 2022 / 12:00PM, SWMA.ST - Q4 2021 Swedish Match AB Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Anders Larsson Swedish Match AB (publ) - CFO & Senior VP of Group Finance

Emmett Harrison Swedish Match AB (publ) - SVP of IR & Corporate Sustainability

Lars Dahlgren Swedish Match AB (publ) - President & CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Andreas Lundberg SEB, Research Division - Analyst

Fredrik Ivarsson ABG Sundal Collier Holding ASA, Research Division - Research Analyst

Gaurav Jain Barclays Bank PLC, Research Division - Research Analyst

Jared T. Dinges JPMorgan Chase & Co, Research Division - Analyst

Nik Oliver UBS Investment Bank, Research Division - MD, Head of European Consumer Staples Team & Analyst Owen Michael Bennett Jefferies LLC, Research Division - Equity Analyst

Rashad Kawan Morgan Stanley, Research Division - Equity Analyst

Richard Felton Goldman Sachs Group, Inc., Research Division - Equity Analyst

P R E S E N T A T I O N

Operator

Welcome to the Swedish Match Full Year 2021 Conference. (Operator Instructions) Today, I am pleased to present Emmett Harrison, Senior Vice President of Investor Relations. Please begin your meeting.

Emmett Harrison - Swedish Match AB (publ) - SVP of IR & Corporate Sustainability

Thank you. This is the Swedish Match Full Year 2021 Telephone Conference. And with me today are Lars Dahlgren, our President and CEO; and Anders Larsson, our CFO. In the Investors section of our swedishmatch.com website, you will find our full year investor presentation. We encourage you to have that presentation at hand as you listen to our prepared commentary for this call. Several of the slides in the investor presentation repeat key messages from the interim report that we published this morning. We will focus our commentary on select slides only. And while doing so, we will refer to the applicable page number of the presentation. After our prepared commentary, we will be taking questions.

During today's call, there may be certain comments that constitute forward-looking statements and are subject to risks and uncertainties. Management believes that these statements are based on reasonable assumptions, but can give no assurance that expectations will be achieved. Risk factors are outlined in today's interim report as well as the annual report, which are available on our website. Swedish Match assumes no obligation to update information concerning its expectations. A recording of this call will be made available on the Swedish Match website. And with that, I will now hand the word over to Lars.

Lars Dahlgren - Swedish Match AB (publ) - President & CEO

Thank you, Emmett, and good afternoon, everyone. The publication of our 2021 full year report this morning marked the close of another highly successful year for Swedish Match. In fact, 2021 was the fourth year in a row in which Swedish Match reported double-digit growth in sales and operating profit from product segments. For 2021, specifically, revenues and earnings in local currencies grew at double-digit rates for all 3 product segments.

2

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

FEBRUARY 16, 2022 / 12:00PM, SWMA.ST - Q4 2021 Swedish Match AB Earnings Call

Once again, the Smokefree segment led the way with impressive performance for ZYN in the U.S., attracting adult consumers across the nicotine consumption spectrum, and successfully defending its leading position despite ongoing and intense competitive activity. While the financial performance of the Scandinavian Smokefree business benefited from timing factors, it delivered robust revenues and operating profit growth on an underlying basis with good volume, volume development and improved pricing. Despite production-related challenges, cigars delivered record sales and earnings on the back of increased volumes and improved pricing. The Lights business reported extra strong cash flow generation benefiting from the successful continuation of its asset rationalization program and strong underlying profit growth when adjusting for timing effects on asset gains and similar items. The solid financial performance in 2021 and in prior years are particularly encouraging given the significantly ramped up investments to support growth, with additions of fixed capital, strengthening our organizational scopes and capabilities and market-related investments. Not only does the payoff from these investments show in our reported numbers, but importantly, across the group, the quality of revenues has improved markedly over the past years. Within cigars, the successful strategy of focusing on the faster-growing natural leaf segment, has further enhanced the prospects of our cigar business. In a category with historical overall growth rates that stand out in the tobacco industry.

When the intended separation of the cigar business is completed, the cigar business will have even better possibilities to exploit opportunities as an independent company. The profile of our Lights business has become increasingly attractive as the match and lighter portfolios have developed with adjacent consumer products and technological developments that have resulted in growth of business-to-business revenue streams with exposure to growing consumer products categories. But the most notable effects are seen within our largest product segment, Smokefree.

Local currency sales for Smokefree have grown on a compound annual basis by 20% over the past 2 calendar years, with the result being that 2021, the Smokefree product segment by itself, registered sales that were very close to the sales for the entire group as recently as 2018. 2 years ago, less than 20% of Smokefree sales were comprised of nicotine pouches. In 2021, this number had more than doubled to close to 40%, reflecting both stellar market growth and success in execution. In both Scandinavia and the U.S., the market for nicotine pouches continued to grow by well above 50% in volume terms in 2021. In addition, while still small in size, nicotine pouch category growth in some of the geographies included in other markets was significant.

Another indication of our portfolio adaptation towards providing adult consumers with attractive and viable alternatives is the share of pouch products generally in our portfolio. In 2019, 2/3 of our Smokefree can volumes were comprised of pouch products. In 2021, that number had grown to 93%, even as our loose varieties continue to perform well.

Our successful strategy is not only the foundation for our ambition to generate strong shareholder returns over time. Our success has also resulted in significant and meaningful contributions to societies and our focus and execution on our strategy will provide even greater opportunities for improved public health in the future. In the U.S., a significant proportion of ZYN consumers have a history of cigarette smoking and less than 6 years since we started to establish ZYN in the Western region, we estimate that the number of ZYN users correspond to 8% to 12% of the number of cigarette smokers.

In Scandinavia, we are approaching an exciting milestone. Many countries have a long-term goal of reducing their smoking incident rates to below 5%. In Sweden, we will soon be there. Official numbers now show that daily smoking is down to 6%. And the trend in Norway shows that the same goal is also well within reach. Among consumer segments, more adaptable to change, the positive transition trends are faster and even more impactful. Measured in the adult population below 34 years of age, consumption of Smokefree products in Sweden and Norway, most notably nicotine pouches, has grown markedly in the recent years, an incidence of daily smoking in this cohort has declined to well below 5% in both countries.

As the true pioneer within the Smokefree space, Swedish Match will continue to develop and adapt through consumer insight, research and development, capital investments, product quality assurance and improvements and with a continually evolving product portfolio, we will continue to offer adult consumers attractive product alternatives that meet and exceed their changing demands. Through the execution of our vision and Smokefree strategy, we are committed to our ambitions for strong shareholder returns and societal contributions.

For a full potential of societal impact, rational sound and proportionate regulations that recognize the power of reduced risk products in the harm reduction equation are needed. In this respect, there were some positive developments in 2021. Regulation specifically recognizing nicotine pouches were adopted in Switzerland and in the Czech Republic. Now we are waiting for the implementation of these regulations. In Denmark,

3

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

FEBRUARY 16, 2022 / 12:00PM, SWMA.ST - Q4 2021 Swedish Match AB Earnings Call

the regulations adopted in 2020 that differentiate nicotine pouches were implemented during the year. There are other European countries where we expect to see developments in 2022. We have, for instance, since long been in a dialogue with the Swedish government advocating for nicotine pouch specific regulation. It now looks like we will see such regulation in place during 2022.

Taxation that reflects the relative harm of product is also a regulatory goal. In Norway, we saw a tax reduction of 25% on snus in 2021 without the corresponding decrease for cigarettes. In 2022, the Norwegian snus tax will be increased by 5.9%, but the increase in cigarettes will be higher. We also noted that harm reduction played a prominent role in the discussions related to what was proposed U.S. federal nicotine tax at the end of last year.

As we turn the page in the book and look forward to 2022 and beyond, I would like to take this opportunity to thank all our employees for their passion, dedication, perseverance throughout this past and highly successful year. Following these introductory remarks, we will now provide some more comments to select slides from our Q4 presentation. And we start on Page 8, which illustrates the ZYN U.S. volume trajectory over the past 5 years on a 12-month rolling basis.

We are very pleased to have shipped more than 48 million cans of ZYN in the fourth quarter, bringing the full year volume to 174 million cans. This corresponds to an impressive year-on-year growth rate of over 50%, both in the quarter and for the full year. Once again, while increased distribution for ZYN has been a supporting factor for the volume growth, higher velocities have been the primary driver. In fact, according to MSA data that captures shipments from distributors to the trade, out of the total growth in the fourth quarter relative to the prior year, more than 75% of the growth was sourced from higher velocities to existing retail shops. The impressive growth was fueled by strong development in both the Western region where we started to launch the brand in 2016 and in regions outside of the West where we started building meaningful presence in mid-2019.

On the following page, you see the volume development for ZYN as well as for competitor nicotine pouches over the past quarters as measured by MSA. As we mentioned before, it's recommended that one takes a longer-term perspective in analyzing MSA data, as figures for isolated quarters can be susceptible to ways for distribution expansion changes in the data set and promotional offerings, et cetera. Viewed over several quarters, the strong and consistent growth of the U.S. nicotine pouch category is well depicted. We now estimate that the category has reached a size of around 300 million cans based on annualized Q4 run rates. This means that already now, the nicotine pouch category exceeds the size of moist snuff pouches, which previously was the fastest-growing oral Smokefree alternative for adult users.

The extraordinary prospects of the nicotine pouch category have attracted intense competition, including deep and broad-based price discounting and aggressive distribution expansion activities. But ZYN stands apart with its outstanding quality, superior brand franchise and popularity. The resilient market share of ZYN throughout most of 2021 is a testament not only to the strong brand equity and ZYN's appeal with consumers, but also the outstanding capabilities of our organization. Even while our own promotional activities remain modest compared to most of our competitors, we ended the year with a quarterly volume market share for ZYN of 64%. In fact, mentioned in dollar terms, ZYN market share exceeds 70% by comfortable margin.

Turning to Slide 10, the number of adult tobacco consumers discovering ZYN has grown at an impressive rate. Getting an exact read on the number of consumers is challenging as various sources of consumer research indicate different penetration and consumption levels per consumer. We have therefore made a slight modification to this slide relative to what we presented in Q3. Based on indications of average weekly consumption levels per consumer, ranging from 2 to 3 camps, our estimate of the number of ZYN users in the West relative to number of cigarette smokers in that same region is in the range of 8% to 12%, as I referenced in my opening comments. On a national level, our estimate is that the number of ZYN consumers is already around 5% relative to number of cigarettes smokers. Not only do we expect the numbers in consumers to increase, but we also expect that as consumers adopt nicotine pouches more fully throughout their consumer journeys, consumption per adult consumer will also increase. As a reference, based on a sample of consumers registered in the ZYN consumer loyalty program, average weekly consumption per consumer is around 4 cans, which is also more aligned with the consumption levels in more mature oral Smokefree categories and markets. With that, I will hand over the word to Anders.

4

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

FEBRUARY 16, 2022 / 12:00PM, SWMA.ST - Q4 2021 Swedish Match AB Earnings Call

Anders Larsson - Swedish Match AB (publ) - CFO & Senior VP of Group Finance

Thank you, Lars. Moving on to Scandinavia on Slide 11. The Smokefree category in Scandinavia continued to demonstrate robust growth, both in the fourth quarter and for the full year, supported by strong growth in all three countries: Sweden, Norway and Denmark. With COVID-19 related impacts and timing effects on shipments, it is challenging to estimate with precision the underlying growth, but our estimate is that the Scandinavian Smokefree category grew by approximately 10% in volume terms in 2021 versus the prior year.

On Slide 12, we illustrate a more detailed view of the total Smokefree category in Scandinavia on a 12-month rolling basis based on Nielsen and online sales data. As can be seen on the slide, traditional Smokefree products, such as snus, continued to show healthy growth in 2021 versus 2020. And it is very encouraging to see the incremental contribution to the category from the fast-growing nicotine pouch market. It is clear that nicotine pouches appealed to an even broader consumer base, not the least being those remaining smokers of every gender. And as referenced in Lars's opening statement, cigarette smoking in Scandinavian countries has declined to unprecedented levels.

Along with the increased penetration, consumer demographics have become increasingly attractive from a growth perspective. It should be noted that the Norwegian tax cut for Smokefree products, which was implemented at the beginning of 2021, likely had some positive effect on overall category growth.

As measured by Nielsen, Swedish Match's market share of the overall Scandinavian Smokefree category declined by less than 1 percentage point sequentially from the third quarter, impacted by mix effects. When looking at the snus market in isolation on Page 14, you will note that our share has been holding at a consistent level and continues to be more than twice the size of the second largest producer. In Scandinavia, snus is still the dominant form of Smokefree products, and the snus market is estimated to represent approximately 3/4 of the total Smokefree category.

Our Scandinavian snus portfolio provides opportunities for strong cash flows and profits for both Swedish Match and our retail partners, which, together with our expertise in category management, provide excellent platforms to support further growth for our entire range of products, including nicotine pouches.

Moving on to Page 15 and nicotine pouches in Scandinavia with data as reported by Nielsen. With its rapid growth, the nicotine pouch market has grown to around 1/4 of the Scandinavian Smokefree category. The market continues to be highly competitive and the introduction of new brands and products often accompanied by broad-based promotional offerings has helped to fuel volume expansion in the nicotine pouch market. Swedish Match's portfolio of nicotine pouches showed strong volume gains in 2021, but at a pace that was somewhat softer than the overall market growth rate. The vibrant range of VOLT nicotine pouches that was introduced during 2021 has continued to grow its market share, finishing the year at around 5% of the Swedish nicotine pouch market. Improving our share in this rapidly growing market remains a challenge. But as we have communicated during the third quarter conference call, we have an exciting pipeline of innovations that have shown very promising test results on several key parameters.

Turning to Page 16, the moist snuff in the U.S., based on MSA distributor shipment data, the category as well as Swedish Match saw declining volumes in the fourth quarter compared to the prior year. The reversal back to more normal consumption trends for the traditional Smokefree segments, which we talked about in Q3, has continued. And once again, we faced tough comparisons versus the prior year when COVID-related purchasing patterns, we believe, elevated demand. Our moist snuff shipments in Q4 increased by 2%, performing a bit better than what MSA data indicated. Our positioning toward the value price segment has benefited us as we note that Longhorn has continued its positive market share trajectory. Improved pricing has further enhanced the financial development of our moist snuff portfolio. According to MSA for the full year, while category volumes were slightly down, Swedish Match moist snuff volumes were virtually flat.

Moving on to U.S. chewing tobacco on Page 17, the reversal to historical category decline rate is clearly apparent. The 2021 volume decline of 8% should be seen in light of this and on a compounded annual basis, volumes from 2019 to 2021 declined by 4%. That volume decline rate has aligned closely with the annual average rate of price improvements during those years. The price/mix impact has remained positive even while Swedish Match volume mix has continued to shift towards our value price offerings.

We now move on to U.S. Cigars on Page 19. The graph on the left-hand side of the page depicts the solid growth of the mass market cigar category, excluding little cigars over the past 10 years, driven by a strong positive volume development for natural leaf varieties. According to MSA, despite

5

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.