A fine time to be in the cigar business

Altadis and Swedish Match post good third-quarter cigar results

Los Angeles, November 23 – The U.S. is still smokin’.

The biggest players in the U.S. cigar market – Altadis S.A. and Swedish Match – both reported fairly good results for the nine months ended September 30, continuing the strong performance of the cigar segment in both companies.

• Altadis S.A.:
The world’s biggest cigar company saw its cigar sales volume drop significantly, but Altadis made more money than ever.

Cigar sales totaled 2.46 billion units, down 5.6% from the same period in 2005, but the economic results couldn’t be better:

• Sales reached 660 million Euro, or about $849 million U.S, up 2.1% over what was a record-setting year in 2005.

• Costs were down by 3.4%, so the profit margin was a sensational 212 million Euro (about $273 million U.S.), up to a remarkable 32.1%! That’s a gain of almost four points from last year.

Sales in the U.S. market were up 4% for the first nine months of the year, despite a modest third quarter and what Altadis called “increasing competition.” The best-performing sectors were premium cigars and machine-made cigars with natural-leaf wrappers (example: Dutch Masters). Altadis also reported nine-month sales figures for J-R Cigars (including its retail, telephone-Internet and wholesale divisions) of 39 million Euro (or $50.15 million U.S.); the company can purchase the remaining 50% of J-R in 2008 if it chooses.

Of course, Altadis owns half of Habanos S.A., the distribution arm of the Cuban cigar industry and sales increased by almost 14% to 104 million Euro ($133.7 million U.S.) compared to 2005. The financial report noted that sales in “emerging markets” such as Morocco, Russia, in the Asia-Pacific region and in Latin America were starting to become real contributors to earnings.

Altadis’s other cigar sales effort is in Europe, outside of the sales of Havanas. This market was weak, as the Spanish market was impacted by new legal restrictions on where tobacco can be sold and performance in France was down generally. Overall sales in Europe were down by 10.5% in the number of units sold and down 8.5% in sales, from 120 million Euro (about $154 million U.S.) in 2005 to 109 million in 2006 (about $140 million U.S.).

By itself, the third quarter wasn’t a strong one as overall cigar sales were down almost 10% and earnings (before income taxes, depreciation and amortization) were off 8%. But after two strong quarters, these dips weren’t severe enough to cause alarm.

Altadis is still, at its core, a cigarette company. Cigarette sales totaled 1.25 billion Euro for the first nine months of the year, but this was down 15.1% from the same period in 2005 and earnings took a 22.1% hit. Most of this was due to new regulations in the company’s primary market of Spain and Altadis has responded with a cost-cutting program that will last through 2008.

Overall, the company is still quite profitable. Through nine months, it had 2.94 billion Euros (about $3.78 billion U.S.) in sales and net income after all taxes and deductions of 339 million Euro (about $436 million).
%%pagebreak%% Swedish Match:
The world’s number-two cigar seller, Swedish Match had a tough third quarter, but cigars were a bright spot. The company’s sales of snuff, chewing tobacco, pipe tobacco and matches/lighters were all off, but cigars stormed ahead with a three-percent gain over 2005.

For the nine months ended September, cigars were up 4% over 2005 even as the company showed a 4% loss in total sales volume over last year.

In the cigar section, things were hot for Swedish Match:

• Not only were cigar sales up to $127.5 million U.S., but the operating income in the third quarter was up 19% over 2005 to $31.7 million! Sales for the first nine months of the year were up by 4% to $360 million, and income for the first nine months of the year zoomed ahead by 34% to $82.4 million.

(By comparison, Swedish Match’s sales total is about 42.4% of Altadis’s for the same period in 2006.)

• Profit margins on cigars reached an impressive 24.9% in the third quarter and 22.9% for the first three-quarters of the year. The interim financial report credited the strong showing not simply to increased sales, but also to “lowered overhead costs following the integration of General Cigar.” Most of the General Cigar staff moved from New York to Richmond, Virginia in May of this year.

The report did include a note on the endless litigation over the Cohiba trademark registration contested between General Cigar and Cubatabaco. Since the U.S. Supreme Court declined to review the findings of the Second Circuit Court of Appeals and left the trademark in General’s hands, a request for dismissal of the case has been filed with the U.S. District Court for the Southern District of New York. At the same time, however, according to the report, “Cubatabaco has asked the Office of Foreign Asset Control [of the U.S. Treasury] for a license to register the Cohiba trademark in the U.S. and thereby cancel General Cigar’s registration of the trademark. General Cigar will oppose the granting of such a license.” The chances of such a request being granted during the remainder of the Bush Administration would seem quite remote in view of the hostile attitude that Federal intellectual-property agencies – such as the Patent and Trademark Office – have taken of Cuban trademark claims in recent months.

Overall, Swedish Match reported healthy sales of about $460 million U.S. for the third quarter and approximately $1.334 billion for the first nine month of 2005. Operating income remained quite nice, up 5% for the third quarter (excluding one-time items) and up 18% for the year so far.

As with Altadis, strong U.S. continue to drive stronger profits for Swedish Match. Even with all of the regulatory and political issues surrounding tobacco, this is a fine time to be a big player in the cigar business.
~ Rich Perelman


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