Wednesday, February 16, 2022

Swedish Match Reports Earnings for 2021

We mentioned Swedish Match AB (SWMA.ST/SWMAY) as one of the likely survivors in yesterday's writeup on the tobacco industry. They are a Swedish multinational tobacco company, headquartered in Stockholm, with businesses that date back to the 19th century. A great indicator of the company's attitude toward shareholder value is this page on their site, "shares outstanding", which shows a declining share count thanks to buybacks.

Now they have three business segments, smokefree, cigars, and "lights". The smokefree business includes the new Zyn nicotine pouch product, traditional Swedish snus (brands include General and Göteborgs Rapé), and moist snuff tobacco. The cigar business is divided into "homogenized tobacco leaf" and natural leaf cigars. "Lights" are cigarette lighters and matches. They have announced plans to spinoff the cigar business to shareholders so that the remaining company can call itself entirely smokefree. The smokefree business is responsible for 67% of sales and 74% of revenues. Even though it is a Swedish company, 64% of total sales, 56% of the smokefree revenues, and 100% of cigar revenue is from the U.S.

The market capitalization of Swedish Match is $12.1 billion (USD). Net income for 2021 was $684 million which puts the company at just under 18x earnings. Sales were up 11% in 2021 over 2020, net income was up 27%, and earnings per share were up 31%.

What is amazing about the company is how quickly the Zyn business is growing. This, in turn, is because Zyn is widely acclaimed as the best nicotine lozenge:

People say things like, "I very much prefer the specific buzz Zyn gets me." As with the nicotine vapes, subtle differences in chemistry and manufacturing matter for the user experience. (It is not for nothing that Swedish has long experience with a traditional oral tobacco product, snus.) The product superiority translates into huge volume growth for Zyn.

Our style of value investing rarely buys hockey stick growth, but here is hockey stick growth available for 18x earnings.

Shipment volumes of Zyn in the U.S. were up 56% in Q4 2021 from Q4 2020, and were up 4% from the third quarter of 2021. Zyn had 64% market share in the U.S. in the third quarter, more than outselling the #2 (Altria's On!), #3 (BTI's Velo) and the #4 (Rogue products) combined. Zyn has 64% market share by volume but 70% of revenue share because the other guys have to discount. A highlight from the conference call:

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.

It is interesting that Swedish launched Zyn in the U.S. in the Western states first. According to a slide in their presentation, the Western region has about triple the usage of other regions outside the west. 

Zyn has giant growth potential, it is profitable, and yet it is available for a value stock price. If you saw a company selling a high margin, recurring usage non-tobacco product with a hockey stick chart like the one above, the company would be selling for 18x sales right now, not earnings.


KJP said...

I wouldn't put too much emphasis on a month of data, but Zyn's US market share appears to be continuing to grow in 2022:

It's interesting that Velo (BAT brand) appears to be dominating nicotine pouches in Scandanavia: See slide 22 --$file/FY_2021_Presentation_Slides.pdf

The BAT slide is consistent with Swedish Match's disclosure that they have a small and falling share of the nicotine pouch market in Scandanavia. See slide 15 --

What is causing Swedish Match to fall behind in nicotine pouches in its home market while dominating that market in the US? Perhaps their strategy in Scandanavia is trying to protect their massive legacy SNU share?

CP said...

Great comment.

Did you see this re: BAT and Velo?

"Volume up 272%, but revenue down 80%."

CP said...

Seems like they can barely give Velo away.


I tried [Velo] and its complete shit. I'm a huge snus fan, but Velo doesnt fit into any of the categories we cover in this forum in my opinion. I dont understand this stuff because it has no flavor and I dont think I'm taking in any nicotine.

I bought one of the 99c cans only one time. I was very disappointed. The can was full of powder and the flavor while good, only seemed to only last a few minutes. I also didn't like how the portion seemed to nearly dissolve after about 10 minutes.

Zyn vs On and Velo. I have tried these three nicotine pouches. First off, Zyn absolutely blows the other two away. The flavor is so much better imo. Even more importantly, Zyn pouches do not mess with my gums at all, especially after I realized that if I wet it a little with saliva before I tuck it in my cheek. Both On and Velo tore my gums up with On being the worst. Before I was even through one can of On, my gums were so sore that I couldn't use any products for a day or so. Those two brands are pure garbage. It seems that every gas station carries Zyn now, and the ones that don't around me say that its coming soon. I switched from General Snus to Zyn. I loved General Snus, but since I switched I do not enjoy the occasional General Snus pouch anywhere near as much as I used to. General Snus flavor is a lot more intense, so now that I am used to the perfectly subtle flavor of Zyn, that's how I want my pouches to be.

CP said...

We still like BTI, though. Camels and Vuse are selling.

KJP said...

I agree with Brewster's response on those BAT and Velo US numbers: How is that even possible? Is it a typo?

From what I've seen, on! has been extensively discounting in the US, which presumably has helped its market share. See, for example, the prices available here:

The fact that Zyn has continued to grow despite on!'s discounting is a good sign.

I also own BTI, along with Swedish Match, Altria, and Turning Point. Now that BTI has come up a bit, I'm going to sit down with all the most recent annuals and think through the right allocation among them and potentially PM.

CP said...

Seems like both on! and Velo are being discounted in the U.S.?

I’ve noticed that on nicotine pouches are selling for $1.59 while Zyn is closer to $4. Does anyone know why? I use 2mg pouches and since velo stopped making 2mg, I started with on and have been loving it.

Very uncool for a member of tobacco oligopoly to make a crappy product and dump it on the market and crash the profit pool for everyone.

Canel Snus and Velo pouches don’t have enough nicotine in them, they are put out by Cigarette companies as a supplement to cigarettes. Those companies don’t actually want you to quit cigs, they just want to give you something to use when you can’t smoke, until you get somewhere that you can smoke.

CP said...

When you figure out the right allocation, please post a comment and maybe we'll even turn it into a guest post?

Can you beat a roughly equal weight basket of PM, MO, BTI, and SWMAY?