July 18, 2008 / 6:57 AM / 10 years ago

Swedish Match Q2 tops forecast, sticks to outlook

STOCKHOLM (Reuters) - Tobacco products maker Swedish Match (SWMA.ST) posted a larger-than-expected rise in second-quarter profit and stuck to its full-year forecast, sending its shares higher.

However, Chief Executive Lars Dahlgren said the market for premium cigars in the United States was “unusually weak” and demand might fall as cost-conscious consumers switch to cheaper cigars as the economy slows.

“People consumed slightly smaller and cheaper cigars. Maybe that’s an indication that people give things an extra thought under these economic conditions,” he said.

Cigars generate roughly a quarter of the group’s profits.

Swedish Match said second-quarter pretax profit rose 9 percent year-on-year to 614 million Swedish crowns ($103 million), versus a mean forecast of 586 million in a Reuters poll.

The firm's shares were up 4.6 percent to 115 crowns at 1353 GMT outperforming the broader Stockholm index .OMXSPI, up 1.5 percent.

The company repeated it expected gains in underlying sales and operating profits in 2008.

“The report looks pretty good overall (with) good snuff sales and a good cigar margin,” a sector analyst who declined to be identified said.

Operating margins for snuff -- sold mainly in the United States and Scandinavia -- rose to 43.0 percent from 39.1 percent versus a forecast 42.9 percent.

Sales at the division, which generates roughly half of group profits, rose 20 percent to 953 million crowns.

The company said snuff earnings in Scandinavia improved significantly year-on-year. “Tax-free (sales) and Norway compensated for lower volumes in Sweden,” it said.

A rise in the excise tax on snuff this year has hit the firm’s sales volumes in Sweden.

In the United States -- the world’s biggest snuff market -- Swedish Match said it gained market share.

Dahlgren, the former chief financial officer who took the top job on June 1, said marketing costs for a nationwide launch in the United States of Red Man snuff had been roughly the same as in the first quarter but with “somewhat” better results.

    In the first quarter, the launch had cut U.S. snuff margins more than the market had expected.

    In presentation material citing data from AC Nielsen, the firm said its share of the Swedish snuff market was 87.5 percent in April and May. In the United States, the share was 11.8 percent for the year up to June 14.

    UNCERTAIN OUTLOOK FOR HIGH-END CIGARS

    The operating margin for cigars, the firm’s second-biggest operation, shrank to 20.3 percent from 22.7 percent, although it was slightly ahead of a forecast 20.0 percent.

    “For cigars, sales have started to return to more normal levels following a weak first quarter of 2008,” the firm said.

    In the first quarter, premium cigars in the United States fared unexpectedly badly.

    “Nothing drastic ... but what we hear, feel and see indicate that the premium cigar market in the U.S. this year is unusually weak,” he said, noting overall cigar sales volumes bounced back more than sales in the second quarter.

    Quarterly group sales rose 6 percent to 3.28 billion crowns, topping a forecast 3.21 billion.

    Editing by Erica Billingham

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