May 8, 2017 / 10:10 AM / 10 months ago

U.S. mass-market cigars lift Swedish Match's first-quarter profit

STOCKHOLM (Reuters) - Tobacco group Swedish Match’s (SWMA.ST) first-quarter core profit rose more than expected, helped by higher U.S. cigar volumes and lower marketing spending on its Swedish-style wet snuff “snus” in that country.

Swedish Match is expanding rapidly in the United States with machine-made cigars, and it is also hoping for a snus break-through there, as a spike in snus competition in core market Sweden challenges its dominant position and erodes margins.

First-quarter operating profit from its product areas grew to 994 million crowns ($113 million) against a Reuters poll forecast of 977 million and up from 939 million a year ago.

The profit excludes larger one-time items and share of net profit in Scandinavian Tobacco Group (STG), in which it has been reducing its stake to 9 percent.

A new U.S. user fee for cigar firms totaled $2.5 million in the quarter. Even so, the company said, cigar profits grew as it gained in a market that showed robust growth.

Chief Executive Lars Dahlgren told Reuters he expected further market share gains this year on particularly strong demand for cigars rolled from entire tobacco leaves - as opposed to sheets made from ground leaves.

Its snus and snuff division’s operating margin narrowed less than expected, to 41.1 percent from 41.8 percent, against a forecast 40.8 percent, as lower costs in the U.S. snus push cushioned a profit drop in Scandinavia.

In the United States, sales volumes for snus and its new tobacco-free product ZYN were growing rapidly, and operating losses shrinking.

    In Sweden, however, already sluggish market growth stalled to nearly nil and Dahlgren said Swedish Match lost some market share not only to budget players but also in its historic key premium segment, to British America Tobacco (BATS.L)

    Swedish Match said it had just raised snus prices in Sweden to compensate for a tax hike at the turn of the year.

    The U.S. Food and Drug Administration in December turned down an application by Swedish Match to market snus in the country as less unhealthy than cigarettes.

    Dahlgren told Reuters on Monday the company was preparing an amendment to the application following talks with the FDA in the quarter, but that it could well take a couple of years before there was a new FDA decision.

    Reported quarterly operating profit was boosted by a capital gain from a sale of a further 9 percent stake in cigar maker STG, which Swedish Match listed on the Copenhagen bourse in the first quarter of 2016.

    Shares in Swedish Match were up 0.6 pct at 0914 GMT, taking a 12-month-rise to 7 percent.

    Reporting by Anna Ringstrom, additional reporting by Helena Soderpalm; editing by Susan Thomas

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