For the week of May 5-9, 2008

Los Angeles – Imperial Tobacco acquired Altadis, S.A. last year because the company sells a lot of cigarettes. It also sells a lot of cigars, in fact more than any other company in the world. Its unquestioned leadership in cigardom was confirmed by Imperial’s release of the full-year results for Altadis for 2007, which showed that the company’s total cigar sales reached $1.31 billion U.S. (converted from Euro). That’s a lot of sticks; the highlights.

=> Total sales volume was down 4 percent from 2006 at 3.165 billion cigars, still an excellent figure.

=> After a difficult first quarter for Altadis U.S.A., total sales revenue for cigars company-wide rose 2 percent in local currency, but poor exchange rates with the Euro saw annual sales revenue dip by 5 percent to 842 million Euro ($1.31 billion U.S.).

=> Earnings in the cigar sector were also down, by 7 percent when expressed in Euro at 262 million ($408.4 million U.S.), but in local currencies were actually up 1 percent for the year. The 31.0 percent profit margin on cigars was still impressive.

=> In the premium sector, including handmade and Cuban cigars (Altadis is the half-owner of the Habanos, S.A. distribution firm), sales in local currencies were up 6 percent, but the conversion from the weak dollar showed a final sales total of 229 million Euro ($356.82 million U.S.). That’s 27.2% of the revenue total. A total of 185 million cigars in this segment were sold, an impressive increase of 5 percent over 2007. That’s a solid showing after a difficult first quarter for Altadis U.S.A. and Havana cigar sales were up by 6 percent over the course of the year. However, please note that this is a modest 5.9 percent of all the cigars sold by Altadis (but worth more than a quarter of the cigar division revenue!).

=> Machine-made cigars with natural leaf wrappers – Backwoods and Dutch Masters are the best examples – actually rose 6 percent if the impact of the weak dollar is eliminated. After conversion to Euro, sales were flat at 371 million Euro or $578.0 million U.S.; about 44.1 percent. Sales of these cigars also increased in 2007, primarily in the U.S. market to 1.59 billion sticks or 50.2 percent of all cigars sold by Altadis.

=> Mass-market cigars and little cigars accounted for 152 million Euro ($236.77 million U.S.) or 18.1 percent. This was down considerably from 2007, off 19 percent as expressed in Euro and down 12 percent when the weakness of the dollar was taken into consideration. Total sales were 1.39 billion cigars or 43.9 percent of the unit volume total. It had been 47.9 percent in 2006.

=> The company’s analysis noted that sales growth was back on track in the U.S. in the second half of 2007 with increased expenditures for advertising and promotion and expects continued, although modest, growth in 2008.

Overall, Altadis is a very healthy company in a challenged industry. Cigarette sales totaled an astonishing $2.72 billion U.S. on sales of 120.7 billion cigarettes during the year, up 3 percent from 2007 in revenue. Earnings before depreciation and taxes was $967.2 million, a very handsome profit margin of 35.6 percent. The company’s total sales, including its logistics division, were $6.3 billion and earnings before depreciation and taxes were $1.9 billion. Both figures were up from 2007. No wonder Imperial wanted to buy Altadis so badly!

>> Swedish Match made a major acquisition in 2007 with the purchase of Internet, mail and store retailer Cigars International. They are really happy they did now. In announcing its first-quarter results, the company’s financial report noted that "Cigars International, acquired in September 2007 has showed a strong performance and growth in line with the acquisition plan. Excluding the impact of acquisitions, sales in local currencies were down approximately 25 percent for premium cigars in the U.S. primarily due to lower shipments to national accounts and trade destocking."

Overall, the good results for Cigars International, pushed Swedish Match’s cigar sales totals for the first three months of 2008 to 757 million Swedish Kronor (about $126.7 million U.S.), actually up by about 3 percent over the first quarter of 2007. Discounting the impact of the unfavorable exchange rate with the dollar, sales in local currency rose by a surprising 9 percent in the quarter, again thanks to Cigars International. Although the U.S. premium cigar market was soft, Swedish Match – the world’s no. 2 seller of premium cigars – still had a pretty strong quarter:

=> Sales in the U.S. of machine-made cigars went down during the quarter, but the company forecasts "[h]igher shipments are expected for mass market cigars in the U.S. from new product launches going forward."

=> In Europe, the acquisition of Bogaert Cigars in 2007 also looks brilliant as sales were flat if its sales are excluded. Swedish Match maintains strong brand presence in Western Europe, especially in France, Spain, Belgium and Finland.

=> While total cigar sales were slightly higher, profits in the cigar sector were down quite a bit to $18.7 million (converted from Kronor), Swedish Match’s least-profitable quarter in cigars in more than two years and down 32 percent from 2007.

=> With cigar results were mixed, Swedish Match continued to grow its snuff and snus business, with sales up by 24 percent over the first quarter of 2007 to $137.4 million U.S. Operating profits of $53.2 million led all sectors of the company with the top sellers being Longhorn, Timber Wolf and Red Man.

=> Swedish Match’s other business units showed mixed results. Pipe tobacco and pipe accessory sales continued to decline and chewing tobacco sales were weaker than in recent years. Sales of matches and lighters were up slightly over the first quarter of 2007.

Overall sales for the company, powered by the increases in snuff/snus sales, were up by 6 percent over the first quarter of 2007 to $471.4 million U.S. (converted from Kronor) and operating profits for the quarter were up slightly to $90.8 million. Those are good results considering the difficulties in the U.S. premium market.

>> Short fillers: To find our latest tasting review, of both blends in The Griffin’s brand, in our News & Views archives for May 2.

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Heard in the Humidor is a publication of Perelman, Pioneer & Company. Copyright 2008; All rights reserved

Cigar Cyclopedia

5/5/08

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