SWEDISH MATCH RESULTS PRESENTATION Q2 2020 DISCLAIMER
The information contained in this presentation has not been independently verified and is subject to change without notice and neither Swedish Match, nor an affiliate thereof or any other party is under any obligation to update or keep current the information contained herein. Accordingly, no representation or warranty, express or implied, is made or given by or on behalf of Swedish Match or any other party (or any of their respective members, directors, officers, employees or any other person) as to the accuracy, completeness or fairness of the information or opinions contained in this presentation, and any reliance you place on such information or opinions will be at your sole risk. Neither Swedish Match nor any other party (or any of their respective members, directors, officers, employees or any other person) accepts any liability whatsoever for any loss howsoever arising from any use of this presentation or its contents or otherwise arising directly or indirectly in connection therewith. By attending a meeting where this presentation is presented, or by reading the presentation, you acknowledge that you will be solely responsible for your own assessment of the potential investment, the market and market position of Swedish Match and that you will conduct your own analysis and be solely responsible for forming your own view of the potential future performance of Swedish Match and its business. This presentation may contain certain forward-looking statements that reflect Swedish Match’s current views or expectations with respect to future events and financial and operational performance. Although Swedish Match believes that these statements are based on reasonable assumptions and expectations, Swedish Match cannot give any assurances that such statements will materialize. Because these forward- looking statements involve known and unknown risks and uncertainties, the outcome could differ materially from those set out in the forward- looking statement. The forward-looking statements speak only as at the date of the presentation and Swedish Match undertakes no obligation to update such forward-looking statements. This presentation contains market data and industry forecasts, including information related to the sizes of the markets in which Swedish Match and its subsidiaries participates. The information has been extracted from a number of sources. Although Swedish Match regards these sources as reliable, the information contained in them has not been independently verified and therefore no assurance can be given that this information is accurate and complete. In addition to the above, certain data in the presentation is also derived from estimates made by Swedish Match. The information and opinions contained in this presentation are provided as at the date of this presentation and are subject to change without notice.
2 Q2– HEADLINE BULLETS o In local currencies, sales increased by 11 percent for the second quarter. Reported sales increased by 11 percent to 4,133 MSEK (3,719). o In local currencies, operating profit from product segments1) increased by 19 percent for the second quarter. Reported operating profit from product segments increased by 17 percent to 1,704 MSEK (1,456). o Operating profit amounted to 1,666 MSEK (1,434) for the second quarter. o Profit after tax amounted to 1,227 MSEK (1,080) for the second quarter. o Earnings per share increased by 19 percent to 7.60 SEK (6.39) for the second quarter. o The second quarter financial performance was negatively affected by COVID-19 impacts. o ZYN continued to deliver strong volume growth contributing to higher sales and operating profit.
1) Excluding Other operations and larger one-time items.
3 SALES AND EBIT SPLIT BY PRODUCT SEGMENT
Sales and EBIT split in percent, YTD 2020 versus YTD 2019 (Jan-Jun)
Sales split EBIT split
YTD 2020 FY 2019 YTD 2020 FY 2019 3,5 4,1 7,3 8,4 23,3 27,1
27,5 29,6
65,2 62,1 73,1 68,8
Smokefree Cigars Lights Smokefree Cigars Lights
4 SALES SPLIT BY GEOGRAPHY AND PRODUCT SEGMENT
Sales split in percent, YTD 2020 versus YTD 2019 (Jan-Jun)
Sales split Smokefree Cigars Lights
7,6 (9,2) 1,8 (2,5) 8,1 (7,1) 3,7 (3,2)
28,0 42,6 (53,5) (32,8) 55,6 64,3 (43,9) (58,0) 100,0 88,3 (100,0) (89,7)
The US Scandinavia Other markets The US Scandinavia Other markets
5 SECOND QUARTER COVID-19 IMPACTS
COVID-19: o Following trade hoarding in Q1 in the US, destocking negatively affected Q2 shipment volumes for moist snuff and to a lesser extent ZYN nicotine pouches. Shipments of chewing tobacco held up stronger than anticipated and the decline in shipments for natural leaf cigars was primarily a consequence of COVID-19 related production constraints. o Manufacturing facilities relatively resilient to date. Q1 suspension of production in Dominican Republic and reduced production immediately after startup due to hygiene and other COVID-19 protocols resulted in reduced shipments of natural leaf cigars, while higher than normal shipments of HTL cigars were supplied by our US cigar production facility. o Shipments of snus and nicotine pouches to Scandinavian travel retail/border classes of trade virtually nonexistent during most of the quarter. o Border closures in Scandinavia have had a notable impact on consumer purchase patterns, with abnormally strong volume in Norway, as consumers were forced to purchase products locally rather than in Swedish border shops. o Timing and execution of certain sales, marketing, and launch activities affected for ZYN in markets outside of Scandinavia and the US. o Higher costs in factories due to implementation of pandemic planning protocols. o ZYN capacity expansion projects in the US and Scandinavia continued according to plan. o Swedish Match complying with recommended protocols from governmental and local health authorities.
6 SECOND QUARTER HIGHLIGHTS SUMMARY
Smokefree: o Higher sales and operating profit in both US and Scandinavia in local currencies driven by nicotine pouches o Sequential growth in shipment volumes for ZYN in the US despite destocking of first quarter hoarding o In Scandinavia, border controls and travel restrictions resulted in volume declines but sales and operating profit benefited from positive product and country mix Cigars: o Swedish Match cigar shipments increased by 2 percent with strong HTL volumes offsetting declines of natural leaf varieties o COVID-19 production constraints in the Dominican Republic caused the decline in natural leaf cigars which resulted in an adverse product mix o Lower operating profit/operating margin resulted from the adverse mix effects as well as higher factory and other operating costs Lights: o Sales growth driven by matches, while lighter sales declined o Operating profit up compared to the prior year for both matches and lighters on a reported basis as well as when adjusted for restructuring charges and land sale o Match performance was strong on higher volumes in many markets, particularly in Brazil ahead of announced price increase
7 SMOKEFREE: Q2 COMMENTARY
Sales for product segment increased 20% in local currencies, operating profit up
Q2-2020 Q2-2019 chg H1-2020 H1-2019 chg July 2019-June 2020 Full year 2019 chg Sales, MSEK 2,695 2,261 19 5,203 4,124 26 9,993 8,914 12 Operating profit, MSEK 1,301 1,039 25 2,455 1,844 33 4,608 3,997 15 Operating margin, % 48.3 46.0 47.2 44.7 46.1 44.8 Snus and nicotine pouches o Continued strong growth for ZYN nicotine pouches in the US - Shipment volumes for ZYN in the US more than doubled compared to prior year and grew sequentially compared to the first quarter despite unwinding in trade hoarding and limited distribution build (ZYN available in approximately 85,000 stores by the end of the second quarter). - Strong profitability development for ZYN benefitting from higher sales, lower manufacturing costs and deferred marketing activities. o Scandinavian* snus shipment volumes down, nicotine pouch volumes up - Continued growth for the combined snus and nicotine pouch category but shipments declined as deliveries to border/travel shops were disrupted and not fully compensated by increased Norwegian domestic volumes. - Operating profit in Scandinavia increased in local currencies as a result of a favorable portfolio mix from high Norwegian volumes but currency translation effects from weaker NOK caused operating profit to decline.
* Sweden, Norway and Denmark.
8 SMOKEFREE: Q2 COMMENTARY
US moist snuff o Volumes higher despite unwinding of trade hoarding - Average pricing and sales down but volumes up on simplified pricing promotion strategy for Longhorn. - Operating profit down on lower sales and higher manufacturing costs, impacted by COVID-19 preventative measures. US chewing tobacco o Shipment volumes (own brands) up, sales higher, but operating profit down - The unwinding of first quarter trade hoarding has not yet materialized and could impact future deliveries. - Continued mix shift towards value price offerings. - Operating profit negatively impacted by changes in the portfolio mix, as well as higher manufacturing costs impacted by COVID-19 preventative measures. International smokefree products in other markets o Volumes up for nicotine pouches but down for chewing tobacco - Operating profit down on lower sales and increased investments for expansion opportunities. - For nicotine pouches outside Scandinavia/US, activities were negatively impacted by COVID- 19 related restrictions. Investments in expansion projects continue.
9 SWEDEN AND NORWAY – COMBINED SNUS AND NICOTINE POUCH CATEGORY
Category volume in Sweden and Norway, 12 months rolling
Million cans 300 +7.6%
250
200
150
100
50
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020
Source: Nielsen Sweden, DVH+SVH/Nielsen Norway, DVH+KBS (including nicotine free).
10 SWEDEN – SNUS CATEGORY
Category volume and retail value growth, Volume share dynamics, year-on-year quarterly
Volume Retail value Q2 2019 Q1 2020 Q2 2020 5% -2.0 85.6% 4% 87.2% 85.2% -1.2 3% 61.2% +0.3 61.5% 60.3% 2% 47.6% 47.6% 47.9% +0.1 1% 34.3% 33.2% 33.3%
0%
-1% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Value price Swedish Match Swedish Match Swedish Match 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 segment SoM value price share premium share market share
Source: Nielsen, DVH+SVH excl. tobacconists (including nicotine free). Please note that the data above excludes nicotine pouches.
11 SWEDEN – NICOTINE POUCH CATEGORY
Volume share development, 4-weeks rolling Nicotine pouch category size Manufacturer volume shares, relative to the snus category nicotine pouch category Swedish Match Comp 2 Comp 1 Comp 3 Comp 4 9% 90% 7,9% 8% 80%
7% 70% 62,9% 6% 60%
5% 50% 4,0% 4% 40%
3% 30% 25,0% 2% 1,7% 20%
1% 10% 6,2% 3,6% 0% 0% 2,3%
Source: Nielsen, DVH+SVH excl. tobacconists. The snus category base includes nicotine free.
12 NORWAY – COMBINED SNUS AND NICOTINE POUCH CATEGORY
Category volume and retail value growth, Swedish Match volume share dynamics, year-on-year quarterly
Volume Retail value Q2 2019 Q1 2020 Q2 2020 50% +0.4 90.8% 40% 91.0% 91.5% +3.8 +3.8 30% 55.7% 57.1% 58.8% 54.1% 55.0% 20% 51.8% -1.8 10% 14.1% 15.9% 14.1% 0%
-10% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Swedish Match Swedish Swedish Swedish 2018 2018 2018 2019 2019 2019 2019 2020 2020 loose snus Match portion Match snus Match nicotine segment share snus share market share pouch share
Source: Nielsen, DVH+KBS.
13 NORWAY – NICOTINE POUCH CATEGORY
Volume share development, 4-weeks rolling Nicotine pouch category size Manufacturer volume shares, relative to the snus category nicotine pouch category Swedish Match Comp 1 Comp 2 30% 28,1% 90%
80% 25% 70% 66,4% 20% 17,6% 60% 50% 15% 40% 9,6% 10% 30%
20% 19,5% 5% 14,0% 10%
0% 0%
Source: Nielsen, DVH+KBS. The snus category base includes nicotine free.
14 US – ZYN DEVELOPMENT IN THE US
ZYN shipment volumes in the US, 12 months rolling
Million cans 90
80
70
60
50
40
30
20
10
0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020
Source: Swedish Match direct sales.
15 US – NICOTINE POUCH CATEGORY GROWTH AND ZYN SHARE DEVELOPMENT
Category volume and ZYN share development, 13-week periods
ZYN Velo Pouches On! Dryft Rogue ZYN Share
96% 97%
80% 77% 77% 74%
0 0 3/31/2019 6/30/2019 9/29/2019 12/29/2019 3/29/2020 6/28/2020
Source: MSA, weekly data.
16 US – ZYN BENCHMARKS
The western region* Regions outside of the west**
Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 160% 30% 139% 140% 128% 25% 23% 115% 120% 21% 20% 100% 90% 16% 80% 72% 15%
60% 10% 10% 7% 40% 28% 23%27% 18% 5% 4% 4% 20% 15% 3% 1% 2% 0% 0% Size relative to moist snuff Size relative to moist snuff Size relative to moist snuff Size relative to moist snuff pouches pouches
Source: MSA. *Initial launch date June 2016. ** National launch initiated in April 2019.
17 US – MOIST SNUFF
Positive category growth, Swedish Match’s volumes have outperformed the category
Moist snuff category and Swedish Match volume growth Pouches, category Volume growth year-on-year Million cans pouches YTD 2020 CAGR 9.1% Year-on-year Category Swedish Match 237 243 257 265 19.4% 12% 190 214 144 169 10%
8% 2012 2013 2014 2015 2016 2017 2018 2019
6% Pouches, Swedish Match 4% Million cans shipped
2% CAGR 14.0% 20 4.2% 0% 17 18 13 15 10 12 -2% 8 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 2012 2013 2014 2015 2016 2017 2018 2019 Category Swedish Match
Source: Industry estimates, Swedish Match direct sales, and MSA.
18 US – CHEWING TOBACCO
Swedish Match shipment volume Chewing tobacco category and Swedish Match growth and price/mix percentage volume growth year-on-year** change year-on-year* Total category Premium segment Price brands
Volume Price/mix Category Swedish Match Segment Swedish Match Segment Swedish Match 10% 0% 0% 20% 8% -2% 6% -1% 15% 4% -4% 2% -2% 0% -6% 10% -2% -3% -8% -4% 5% -6% -4% -10% -8% -10% -5% -12% 0% 2014 2015 2016 2017 2018 2019 YTD YTD 2020 FY 2019 YTD 2020 FY 2019 YTD 2020 FY 2019 2020
* Source: On reported basis. Excludes Co-Pack. ** Source: MSA. Price brands = Price large bag segment + Price small pouch segment.
19 SNUS AND NICOTINE POUCHES: RECENT NEW PRODUCT AND NEW MARKET ACTIVITIES
Sweden Norway o Improved ONE: Svart, Blå, Vit + two new varieties Gul and Grön o G.4 Dark Frost Slim o G.3 Sparkling Slim
o ZYN: Northern Woods Slim Dark Frost Slim Espressino Mini Dry Extra Strong
The US Other markets outside the Expanded availability of US and Scandinavia for ZYN ZYN varieties: ZYN Citrus, ZYN Chill o ZYN launched in a limited and ZYN Smooth number of stores in Bosnia and Poland
20 CIGARS: Q2 COMMENTARY
Volume growth due to strong HTL shipments, offsetting declines for natural leaf cigars
Q2-2020 Q2-2019 chg H1-2020 H1-2019 chg July 2019-June 2020 Full year 2019 chg Sales, MSEK 1,069 1,095 -2 2,197 2,092 5 4,354 4,249 2 Operating profit, MSEK 351 411 -15 782 795 -2 1,564 1,577 -1 Operating margin, % 32.9 37.5 35.6 38.0 35.9 37.1
o Shipment volumes up 2% but adverse mix effects - Sales in local currency down 5%, impacted by production constraints for natural leaf cigars. - Staffing for natural leaf production in the Dominican Republic operations has returned to more normal levels, but production efficiency adversely impacted by COVID-19 related manufacturing protocols. - Cigar category volumes up sharply based on distributor shipments to retail with Swedish Match volume growth based on this same measure outpacing the category. o Operating profit down 15% due to portfolio mix shift and higher manufacturing costs, impacted by COVID-19 preventative measures. o Market share growth* year-on-year, but down sequentially from Q1 - Year-on-year market share grew for HTL cigars, more than offsetting share declines for natural leaf.
* Source: MSA through June 28.
21 US – CIGARS
Swedish Match shipment Cigar category and Swedish Match volume growth year-on-year** volume growth year-on-year* Total category Natural Leaf HTL
Volume growth Category Swedish Match Segment Swedish Match Segment Swedish Match
25% 25% 25% 25%
20% 20% 20% 20% 15% 15%
15% 15% 10% 10%
5% 5% 10% 10%
0% 0% 5% 5% -5% -5%
-10% 0% 0% -10% YTD 2020 FY 2019 YTD 2020 FY 2019 YTD 2020 FY 2019
* Source: Swedish Match direct sales. ** Source: MSA distributor shipments – mass market cigars excluding little cigars.
22 US – CIGARS
Split on cigar volumes by segment* Swedish Match’s reported cigar shipments (Q2 2020) by quarter and segment**
Million sticks Natural leaf (ex. rolled leaf) Natural rolled leaf HTL Swedish Match Comparable market 500 450 400 25% 350 44% 41% 300 250 59% 16% 200 150 14% 100 50 0
* Source: MSA distributor shipments, excluding segment for pipe cigars, littles, and ‘other’. ** Source: Swedish Match direct sales.
23 LIGHTS: Q2 COMMENTARY
Sales and operating profit up
Q2-2020 Q2-2019 chg H1-2020 H1-2019 chg July 2019-June 2020 Full year 2019 chg Sales, MSEK 275 266 3 584 580 1 1,204 1,200 0 Operating profit, MSEK 52 6 746 119 50 140 307 238 29 Operating margin, % 18.9 2.3 20.4 8.5 25.5 19.8 o Sales up for matches, but decline for lighters - Sales for matches up on strong volume development as well as improved price/mix. - Significantly higher volumes for matches in Brazil in anticipation of price increase but weakened Brazilian real negatively impacted reported sales development. - Sales for lighters declined on reduced volumes partly attributable to COVID-19 effects. o Reported operating profit up significantly - For lighters, benefit of improved product mix, cost controls, and reduced raw materials pricing. - Operating profit grew for matches on a reported basis, and also when adjusting for the benefit from a land sale in Brazil, which amounted to 6 MSEK as well as prior year restructuring costs of 12 MSEK.
24 REGULATORY EVENTS o FDA guidance on flavors - In January 2020, the US FDA stated that it still intends to issue a regulation that would ban the use of characterizing flavors in cigars, but indicated that it intended to defer regulatory actions against cigars until May 12, 2020 at which time substantial equivalence or new product application filings were due for products that were not in the market on February 15, 2007. On March 30, the FDA filed a motion with the United States District Court for the District of Maryland requesting a 120-day extension of the May 12 deadline which would move it to September 9, 2020. On April 22, the court granted the requested extension. o Chewing tobacco in Germany - A determination was made by a Bavarian Administrative Court that certain chew bags sold under the Thunder brand should not be classified as chewing tobacco and would therefore not be permitted to be sold on the German market. Swedish Match appealed this decision to the Federal Administrative Court, which in June 2020 decided not to grant leave to appeal which means that the decision by the lower court is final. While this is a product specific ruling, Swedish Match is of the opinion that there may be a cessation of sales of most chew bags in their current form in Germany.
25 FINANCE NET AND EPS
XX XX Development of the finance net Maturity profile of interest bearing liabilities By quarter Debt as of June 30, 2020
MSEK Net finance cost Net interest expense MSEK 4 000 Fixed Float 0 -20 3 000 -40 2 000 -60 1 000 -80 0 -100 2020 2021 2022 2023 2024 2025 2026 2027 2028 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
EPS bridge Net debt/EBITA YTD 2020 vs YTD 2019 (SEK)
2,5 EPS 2019 YTD Jun 11.56 Operating profit 2.95 2,0 Financial items -0.16 1,5 +28% Tax rate -0.27 1,0 2,1 2,1 Chg in number of shares 0.66 0,5 EPS 2020 YTD Jun 14.74 0,0 FY 2019 Jun, 2020
26 OUTLOOK (UNCHANGED)
Swedish Match expects that the trend of increased interest from consumers, industry participants and regulators in less harmful alternatives to cigarettes will continue. Our ambition is to create value for both shareholders and society by providing products that are recognized as safer alternatives to cigarettes. For 2020, Swedish Match expects continued market growth in global markets for smokefree nicotine products, most notably driven by rapid growth of nicotine pouches (both without tobacco and with small amounts of tobacco). During 2020, Swedish Match expects to increase its investments in marketing, distribution and sales efforts in both existing and new markets to actively participate in growth opportunities. Continued capital investments by Swedish Match to further expand ZYN production capacity are expected to result in capital expenditures in 2020 considerably above the 2019 level. The effective corporate tax rate in 2020, excluding associated companies and larger one-time items, is expected to be in the 22 percent to 23 percent range. The Company remains committed to returning cash not needed in operations to shareholders.
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