Swedish Match : Transcript

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SWMA.ST - Q2 2022 Swedish Match AB Earnings Call

EVENT DATE/TIME: JULY 22, 2022 / 12:00PM GMT

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JULY 22, 2022 / 12:00PM, SWMA.ST - Q2 2022 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

Gaurav Jain Barclays Bank PLC, Research Division - Research Analyst

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

Rashad Kawan Morgan Stanley, Research Division - Equity Analyst

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

Operator

Welcome to the Swedish Match Q2 Report 2022. (Operator Instructions). I'll now hand the floor to Emmett Harrison, Senior Vice President of Investor Relations. Please begin your meeting.

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

This is the Swedish Match Q2 2022 Telephone Conference. And those presenting today are Lars Dahlgren, the President and CEO and Anders Larsson, the CFO. In the investors section of our swedishmatch.com website, you will find the Q2 investor presentation.

You're encouraged to have the Q2 2022 investor presentation at hand. As you listen to the prepared commentary for this call. Some of the slides in the investor presentation repeat key messages from the report that were published this morning. The commentary will therefore focus on a smaller number of slides that have been selected. And while doing so, there will be reference to the applicable page number in the presentation. Unless otherwise stated, all comparisons are versus the prior year's corresponding period.

For U.S. smoke-free and cigars, comments on financial developments are made based on results achieved in local currency measured in U.S. dollars. And when we refer to market share unless indicated differently, we refer to MSA data that measures shipment volumes from the distributors to the trade.

After the prepared commentary, speakers 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 that can give no assurance that expectations will be achieved.

Risk factors are outlined in today's interim report, as well as, the annual report, both of which are available on the Swedish Match 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. The call will now be turned over to Lars Dahlgren.

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

Thank you, Emmett and good afternoon, everyone. I will start by highlighting a number of encouraging factors described in our second quarter reports that we issued this morning. From a financial perspective, a reported operating profit from product segments are SEK 2,271 million is an all time high, and for the first time ever, our quarterly revenues exceeded SEK 5 billion.

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JULY 22, 2022 / 12:00PM, SWMA.ST - Q2 2022 Swedish Match AB Earnings Call

What is particularly encouraging is the fact that the strong growth was principally sourced from our smoke-free segment reflected continued progress towards a vision of a world without cigarettes.

While our financial performance benefited from currency developments, especially the stronger U.S. dollar, growth in local currencies was respectable at 11%. And for our smoke-free segment, revenue growth across all markets aggregated 17% in local currencies.

In the second quarter, smoke-free represented more than 70% of sales for product segment and more than 80% of operating profit from product segments. This is despite the significant market related investments and support for future growth opportunities that were made across markets in our smoke-free business.

The strong quality of revenues was further accentuated in that, the key driver for growth within smoke-free across markets was nicotine pouches, reflecting not only the outstanding potential for the nicotine pouch category, but also our own progress in this attractive category. In the first 6 months of 2022 nicotine pouches represented more than 30% of group sales from product segments up from 20% 2 years ago.

Once again, seen in the U.S. was the largest contributor to revenue and earnings growth. Velocities for ZYN continue to increase in both the rest and expansion markets and our market share continue to demonstrate resilience despite the continued aggressive consumer price promotions from a large competitor. According to IRI, ZYN accounted for more than 3 quarters of total U.S. nicotine pouch retail sales in the quarter.

In Scandinavia, smoke-free markets continue to demonstrate strong market growth, and about our Scandinavian smoke-free earnings were lower than in the prior year quarter, reflecting our ambitious launch plans and brand building activities, adverse channel mix effects and the higher cost level. We remain excited about the prospects or more accurately participating in this market growth given our marketing and new product development investments.

Our cigar business has faced operational challenges for some time and we now see a category that has retrenched somewhat from the elevated levels during the pandemic. Financially, cigars delivered a weak performance during the quarter caused by the lower volumes, cost inflation, as well as, increased consumer loyalty investments.

However, consumer demand remains higher than pre-COVID levels. And we are pleased to report that thanks to progress in increasing production output for natural leaf varieties. We grow share both sequentially and year-on-year within the strategically important segment, resulting in Swedish Match regaining the number 2 position within the U.S. mass market cigar category in volume terms according to MSA.

Regarding life, the reported operating profit development does not adequately convey the underlying performance, most notably due to the significant income of temporary in nature, reported in the prior year period. In fact, for both matches and lighters volume declines and inflationary cost pressure were efficiently addressed through active price and portfolio management, resulting in underlying earnings growth.

Looking forward however, the suspension of Russian deliveries and software demand from some industrial clients imply that the earnings level reported in the second half of 2021 could be challenging to meet.

On the regulatory front, we're pleased to note that the Swedish parliament has now approved the marketing regulations for nicotine pouches, something that Swedish Match has been advocating for quite some time.

Staying with Sweden, we do expect a notable excise tax increase on snus by year end, due to the indexation to the unusually high inflation from June 2021 to June 2022, plus semi indicated extra 3%.

In the U.S., while there has been a steady regulatory news flow relating to other products, there have not been any significant developments since the April announcement on the proposed product standard relating to characterizing flavors in cigars. And the commentary period is still ongoing.

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JULY 22, 2022 / 12:00PM, SWMA.ST - Q2 2022 Swedish Match AB Earnings Call

Regarding the NSEs that Swedish Match received and a limited part of our cigars assortment, those products are still allowed to be sold in the market and there is no conclusion for now on the administrative appeal that we have filed. There have been no approvals, no deficiencies on SE applications pertaining to the balance of our cigar assortment.

Following these introductory remarks, we will now continue in some more detailed comments on our smoke-free product segment, and starting with the same in the U.S. and turning to Slide number 9. With shipments up by 38% to close to 59 million cans. The second quarter marked yet another record period for ZYN.

For the rolling 12 months period ZYN shipment volumes amounted to 203 million cans. The strong volume growth for ZYN was mainly a result from higher velocities but also from an expansion on the store base. At the end of the second quarter distribution for ZYN had reached 134,000 stores an increase of 15% versus the same period in 2021.

It is worth noting that while the promotional intensity for ZYN during the second quarter of 2022 was less than in the first quarter of this year, certain distributors purchased extra higher volumes toward the end of the second quarter in anticipation of the communicated third quarter promotions.

The consistent trend of growing velocities for ZYN continued during the quarter, both in the western region where ZYN was initially launched in 2016, as well as, in regions outside the west where the brand was marketed in a broader scale from April 2019. Nicotine purchase continued to demonstrate not only exciting commercial prospects, but also their potential to significantly contribute to improved public health.

As Slide 10 illustrates the nicotine pouch category is rapidly growing relative to cigarette. Measured by volume and according to IRI data, and we make 1 can of nicotine pouches equivalent to 1 type of cigarettes, nicotine pouch volume for the year-to-date period was well above the 10% benchmark in the west and exceeded 4% on a national level.

Based on indications of average weekly consumption levels for consumer ranging from 2 to 3 cans, our estimate of the number of ZYN users relative to the number of cigarette smokers on a national level is in the range of 5% to 7%. While we expect the number of nicotine part users to continue to grow, we also expect that weekly consumption rates for about consumer will increase as consumers adopt nicotine prices more fully. Another source of growth for the nicotine pouch category in the U.S. are consumers are more traditional smoke-free products such as moist snuff.

On Slide 11, we compare nicotine pouches with the moist snuff category based on MSA data. In the western region, distributor shipments of nicotine pouches in the quarter represented close to 3/4 of the shipments for traditional moist snuff products. In regions outside of the west, a milestone was passed during the second quarter when nicotine pouches grew to become larger than the moist snuff pouch segments.

Turning to quarterly market share for ZYN and category volumes based on MSA data on Slide 12. You will note minor restatements of the market shares for historic periods compared to the slide that we presented after Q1 caused by updates to the MSA data set, but historical trends are the same as previously published data.

As the dotted line depicts, ZYN market share declined by around 1 percentage point in the second quarter relative to the first quarter. However, this should be viewed in light of continued growth based on deep promotional activities from a large competitor and the lighter promotional schedule for ZYN during the second quarter compared to the first. Compared to the second quarter of the prior year, the market share of ZYN increased by close to 1 percentage point to a large extent driven by the strong performance in regions outside of the west.

For market share stated in retail value terms or in dollar terms, we're using IRI data, which captures consumer off-take data rather than shipments to the trade. Our estimate based on IRI is, as I already mentioned, that ZYN represented more than 3/4 of the nicotine pouch category retail sales during the second quarter.

And with that, I will hand over the word to Anders.

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JULY 22, 2022 / 12:00PM, SWMA.ST - Q2 2022 Swedish Match AB Earnings Call

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

Thank you, Lars. Turning to Slide 13 and the traditional moist snuff. Based on MSA distributor data, the category for moist stuff saw decline in volumes in the second quarter compared to the prior year, while Swedish Match volumes were virtually flat.

Our Q2 moist snuff shipments grew by close to 1% versus the same period in the prior year. And our value-priced Longhorn brand continued to demonstrate strength. And similar to the rest of the category, we benefited for meaningful year-on-year pricing effects across our moist snuff portfolio.

Moving on to U.S. chewing tobacco on Page 14. The long-standing trend of category contraction continues along with the migration towards lower-priced offerings. This follows the pandemic period when the secular volume trend took a temporary pause. Our own volumes also declined with modest volume growth for our value price selection, partially offsetting the declines for our premium brands. The favorable effect from price adjustments for this quarter only matched the negative impacts from portfolio mix, which, along with lower volumes, resulted in reduced operating profit.

Turning to smoke-free Scandinavia and Slide 15. As the slide clearly depicts smoke-free products in Scandinavia continued to show robust growth, supported by strong growth in all 3 countries: Sweden, Norway and Denmark. While nicotine pouches have contributed the most to this growth, the consumption of snus has also increased.

On Slide 16, we zoom in on the snus market in Scandinavia. As measured by Nielsen, snus is still the dominant form of smoke-free products in Scandinavia and is estimated to represent approximately 3/4 of the total smoke-free category. As the line in the graph to the left depicts, our share within the overall Scandinavian snus market has been holding at a fairly consistent level.

On a sequential basis from the first quarter, Swedish Match's market share of the snus market in Scandinavia declined only marginal. Our Q2, snus shipment volumes grew by 3% on a year-on-year basis, supported by the recovery of the border trade and travel retail classes of trade.

On Slide 17, we look at the nicotine pouch market in Scandinavia. The Scandinavian nicotine pouch market remains dynamic and intensely competitive, both in terms of new launches of brands and varieties and in terms of promotional offerings. While marketing practices in Sweden need to change beginning of August to comply with the new regulations, we expect a continued high level of competitive activity.

Swedish Matches share within nicotine pouches, as measured by Nielsen, remained stable on a sequential basis from the first quarter, aided by the introduction of several innovative product offerings and enhancements during the quarter. With much of the market activity relating to new product offerings having occurred in channels not covered by Nielsen, Swedish Match estimates that its true market share within nicotine pouches grew slightly on a sequential basis during the quarter.

On Slide 18, we show a wide array of new products that were launched during the second quarter for both snus and nicotine pouches. These include products for the Swedish domestic market for Norway, as well as, products with appeal to consumers who shop at travel retail stores and buy online.

In our first quarter presentation, we mentioned a few of these, noting that products such as VOLT, PEARLS and enhanced quality and sensory upgrade of the rest of the VOLT range as well as the -- as well as, extensions of moist mini varieties would be faced in the -- phased in during the quarter and into the summer in Sweden.

This ambitious launch schedule was accompanied by impactful marketing programs and early trade and consumer indications are positive. Helping to support our volume share growth ambitions for nicotine pouches.

VOLT, PEARLS with its patent-pending technology offers clearly differentiated sensory and functional properties, not the least of which is the ability to manage release properties for both flavors and nicotine delivery. This truly unique assortment further demonstrates our leadership in innovation tied to consumer needs.

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