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I N F O R M AT I O N A B O U T S W E D I S H M AT C H F O R S H A R E H O L D E R S A N D O T H E R S TA K E H O L D E R S

Earnings boosted by snuffOrganic growth of 5 percent was posted during thefirst nine months of 2002, supported by a strong vol-ume trend for snuff. Operating income rose 16 per-cent to 1,865 MSEK and earnings per share by 21percent to 3.11 SEK. The successes noted for snuffwere reflected in a sharp increase in the margin onthis product to 45.3 percent in Q3, compared with38.5 percent a year earlier. Higher volumes, com-bined with changes in price and the product mix, andslightly reduced marketing costs were the main rea-sons for the improved earnings. Page 2

More efficient cigar productionThe Group’s cigar opera-tions have completed anumber of acquisitions inrecent years and has beenconcentrating on integratingthese new companies. Thenext step entails a focus onproduction, to make it moreefficient. At the same timeas production units are being merged, the machinepark is undergoing a comprehensive upgrade. Page 6

Swedish Match sues USTSwedish Match has filed a federal anti-trust com-plaint against US Tobacco Company UST, due tothis company’s use of illegal methods to preventcompetition. UST’s sales-people have received abonus if they succeed in eliminating competingproducts from retail outlets. The methods usedinclude destroying store shelves and painting overor pulling down advertising signs. Page 2–3

Silver medal to the Swedish Match websiteSwedish Match was awarded the silver medal inWebranking™ 2002, the leading survey of the web-sites of listed Nordic companies. Webranking™ sub-jects corporate websites to stringent requirements,whereby the websites have to adapted each year tonew trends and changing capitalmarket demands.Swedish Match also won a medal in the internationalcategory, where it was ranked third. Page 7

#4 november 2002

The annual audit is a never-ending processaimed at upholding the company’s credibil-ity and thus providing security for share-holders. The 40-line report featured in theAnnual Report is actually the result of20,000 hours of audit work, plus the workconducted by the Board and by manySwedish Match employees. The auditorsabove are (from left): Claes Dahlén,Susanne Sundvall, Åke Danielsson andClaes Janzon. Page 4–5

SWEDISH MATCH’S AUDITORS

Licensed to auditLicensed to audit

International interest in the Swedish experienceIn the past six months, nicotine addictionhas been debated in a variety of interna-tional conferences, at which snuff hasbeen presented as an alternative to ciga-rette smoking. The Swedish Experiencehas become an established concept anda change in attitudes to snuff is beingnoted in medical and health circles. Page 8

INTERIM REPORT

Continued strong peThird quarter developments can be summarized asstrong profits despite exchange rates unfavorable to Swedish Match. Organic growth amounted to 5percent during the first nine months of the year, withstrong volume development for snuff. Operatingincome rose 16 percent to 1,865 MSEK andearnings per share was up 21 percent to SEK 3.11.»We will increase the pace of our share buy-backduring the fourth quarter,« says CFO Sven Hindrikes.

Sven Hindrikes.

Swedish Match brings competition lawsuit against UST in US

n its complaint, Swedish Matchcalls for a permanent injunctionagainst UST’s continued use ofillegal methods to impede compe-

tition in the US snuff market and isdemanding damages.

SWED ISH MATCH CLA IMS in its complaintthat it has suffered damage as a conse-quence of UST’s actions. Followingthe introduction of Timber Wolf inthe US in 1994, the Group managedto take a 9-percent share of the USsnuff market, despite the actions ofUST.

»Swedish Match has expandedin the US, but we do not know howmuch greater this growth would havebeen without UST’s illegal actions,which were designed to impede compe-tition,« says Bo Aulin, Swedish Match’s

Swedish Match has filed a federal anti-trust complaint inKentucky against UST. Swedish Match accuses UST of using its near-monopoly status in an impropermanner.

Strategy successTHERE CONT INUES TO BE A high level of uncertaintyin our world. Stable improvement in the stockmarket remains a distant prospect and lately theexperts have revised their forecasts for generalfinancial trends to be less optimistic. Against thisbackground, we are able to affirm that SwedishMatch continues to provide increased profits andshareholder value.

During the third quarter of 2002, operatingincome increased by 16 percent and earnings pershare rose 21 percent. We have now achieved anoperating margin of at least 15.5 percent for 15consecutive quarters with an average of 18 per-cent during 2002. Earnings per share hasincreased more rapidly than overall profit due toour share-repurchasing program.

Our strategies thus continue to prove success-ful. Key growth areas are snuff and cigars, whereoperating income for the first nine months con-tinued to grow at a favorable rate, although cigarshave leveled off. We are continually working toincrease efficiency and to maintain and improveour margins. During the past quarter, we decidedto further raise the tempo of the rationalizationmeasures already announced within the area ofcigars and to adapt lighters production to improveefficiency in the face of intensifying competition.

Our internal efforts to improve efficiency withregard to the tied-up capital also provided favor-able results. We have succeeded in markedlyreducing the amount of capital tied up which canbe seen in our highly positive cash flow. There wasa swing from a deficit in working capital of 163MSEK during the corresponding nine-month periodin 2001 to a net contribution of 59 MSEK in 2002.

This example shows that our Group is well struc-tured, with successful products, stable earningsand a strong financial position. We nurture, main-tain and build on this balanced structure, continu-ing to offer significant potential for increased valuefor Swedish Match’s shareholders.

Lennart Sundén, CEO

wedish Match’s snuff oper-ations continue to developwell. Organic growth insales up to October was afull 18 percent and 16 per-

cent after currency effects caused bythe strengthening of the SEK againstmost of the other currencies in whichSwedish Match sells. Snuff sales totaled2,090 MSEK during January–Septem-ber and operating income 923 MSEK.

Particularly pleasing is the fact thatmarket share in the US increased a fur-ther 1 percent to 9 percent following a10-percent increase in volume!

»OUR SUCCESS W ITH SNUFF can be seen inextremely strong improvements in themargin for these products. During thethird quarter, this amounted to 45.3percent, compared with 38.5 percentfor the year-earlier period,« commentsSven Hindrikes. »Increased volumesare the main explanation, although

changes in pricing and product mix, aswell as somewhat lower marketingcosts have also had a positive effect.«

The Group’s other major productarea, Cigars, has faced a tougher mar-ket climate during the first nine monthsof the year. In local currencies, saleswere largely unchanged, but calculatedin SEK, they declined 2 percent to2,513 MSEK, due to the strongerSwedish currency. On the other hand,operating income developed well dur-ing the first nine months, increasing 14percent to 411 MSEK.

» T H E M A R K E T S I T U A T I O N for Cigars isfragmented,« explains Sven Hindrikes.»Demand for premium cigars is large-ly stable in the US and Europe. Thesame is true of machine-made cigars inEurope. On the other hand, USmachine-made cigar volumes havedecreased. We are currently workingintensively with the product range and

marketing and will be launching newproducts. At the same time, we will bereinforcing the previously announcedefficiency program in Cigars. We willimplement further savings in Europe.This will entail laying off 140 employ-ees in addition to the 150 previouslystated.

Of the remaining two tobacco-product areas, Chewing Tobaccoremained stable, with improved oper-ating income and margin resultingfrom price increases and cost savings.Sales and profit margin for Pipe Tobac-co fell. This is attributable to decliningvolumes in several markets and theweakening of the currency in theimportant South African market.

WITH IN MATCHES AND L IGHTERS , Matchescontinued to demonstrate improvedoperating income and favorable devel-opment of its margin, which was 14percent during the nine-month period,

S

ISwedish Match Inside is a magazine for Swedish Matchshareholders. The print run is 75,000 copies of the Swedish version and 4,000 copies of the English version.

PUBLISHER Swedish Match AB

PUBLISHER RESPONSIBLEBo Aulin

ADDRESSSwedish Match118 85 StockholmTel: +46 8 658 02 00www.swedishmatch.com

EDITORIAL Lena Forsman, Hallvarsson&Halvarsson ABLena Olofsdotter, Swedish Match AB

REPORTERS Birgitta Gunnarsson, Martin Haag, Mats Hallvarsson, Håkan Rylander,

PRODUCTIONHallvarsson&Halvarsson AB

LAYOUT AND DESIGNPeppar Design, Petter Carnhagen

REPRODUCTION Scarena, Stockholm

PRINTINGLjungbergs, Klippan

compared with 10.7 percent during theyear-earlier period. Competition in thelighters area has increased, resulting inlower volumes. »We have already initi-ated a program of cutbacks and ration-alization within Lighters,« says SvenHindrikes.

In summary, the Group continues todevelop well and to deliver strong prof-its for its shareholders. The cash-flowsituation was extremely strong duringthe period, with 0.5 billion SEK beinginvested in the new Gothenburg snusplant and approximately the sameamount being paid in dividends. Lessoperating capital has been tied upthanks to the efficiency program.

» T H E S T R E N G T H O F T H E Swedish kronahas affected us quite a lot. The markethas probably already begun to capital-ize on Sweden’s assumed introductionof the Euro, resulting in a one-offadjustment of the long-term value ofthe Swedish currency. Calculated inlocal currencies, we can see that theGroup’s underlying competitiveness isfavorable. At the exchange rates for thethird quarter of 2001, our profits forthe same period in 2002 would havebeen 43 MSEK higher,« says Sven Hin-drikes. »We are also continuing to saveand rationalize. New measures totalingapproximately 68 MSEK have beendecided and will yield full effect duringthe latter half of 2003.«

Finally, he explains that the Grouphas been cautious in its repurchasing ofshares during the past nine months.Approximately 2.2 million were pur-chased and, at the close of the period,holdings of the Group’s own sharesamounted to 6.4 percent of the total

number of shares. The share-pricedevelopment was strong during the firstsix months. »With increasing liquidity

and a slightly lower share price, we willprobably increase the buy-back pacesomewhat.« ■■

Analysts’ questionsSwedish Match’s interim report was released onOctober 24. Members of the Group Managementthen held a telephone conference with financialanalysts from banks and brokerage firms.

MARTIN STEINIK, J P MORGAN:

»What does the trend of your market for snuffin the US look like, considering that you havenew competition? Has anything special hap-pened that is driving growth?«

EMMETT HARRISON, INVESTOR RELATIONS:

»The latest figures, in October, show total growthof 14.9 percent in sales at the retail level. We hadexpected an increase of between 12 and 13 per-cent. Sales of Timber Wolf increased by 11.8 per-cent during the period from January to October.No special external factors are driving growth; itis, instead, largely stable at this level. Timber Wolfis holding its own very well in this context and thereasons are that it is a good product, with a goodtaste and a good price.«

JONAS PÅLSSON, ABG SECURITIES:

»Snuff shows an operating margin of morethan 45 percent for the third quarter. In con-nection with the six-month report you indicat-ed a probable level of 42 to 44 percent for thefull year. Have you now revised the levelupward? I also wonder what kind of gains youexpect from the restructuring now under wayin Continental Europe.«

SVEN HINDRIKES, CFO:

»We expect that the forecast of an operating mar-gin between 42 and 44 percent for snuff will holdup. When it comes to restructuring, which in-cludes closing a plant, this will result in reducingour personnel requirements by around 150 per-sons. In addition, we have identified a further sav-ings potential involving 140 positions in the admin-istration and sales organizations. The total cost ofthe cutbacks amounts to 68 MSEK. In return, weexpect to reduce annual costs by 30 MSEK begin-ning in the second half of 2003. The greater part ofthe reduction will be in the cigar operations.«

PIETER VORSTER, CREDIT SUISSE FIRST BOSTON:

»Are mass-market sales of cigars in the USdisappointing for you?«

LENNART SUNDÉN, CEO:

»Yes, we have seen a decline in the volume of oursales in the North American market. This meansthat we have really not taken advantage of thegeneral trend of the market, which is basicallyvery strong. We are going to tackle this problemin the future, in part through a number of intro-ductions of new products that are planned in theearly part of next year.«

VIRGINIA HÉÉRIBOUT, CDS IXIS SECURITIES:

»The effects of foreign exchange movementshave certainly reduced your revenue during theyear. What do you expect for the fourth quarterthis year and the first quarter of next year? Andwon't you be compensated, since raw materialprices are also declining to the same degree?«

SVEN HINDRIKES, CFO:

»It is true that the effects of foreign exchangemovements have reduced sales by three percent-age points during the first nine months of theyear. The effect has been caused primarily by theweakening of the US dollar, but the weakness ofthe South African rand and the Brazilian real hasalso affected us. It is naturally impossible to pre-dict what will happen in the future but we see nospecial signs that any strong fluctuations are tobe expected. Where prices of raw materials areconcerned, there is certainly an effect in that area– but we will not notice it until further along in thefuture as our inventories are renewed.«

rformance for snuff

S W E D I S H M A T C H I N S I D E | # 4 2 0 0 2 | 3

General Counsel and Senior Vice Presi-dent.

In 2001, UST’s snuff sales amountedto SEK 15 billion, with a net profit ofSEK 4.6 billion. To defend its lucrativemarket, UST has employed all possiblemeans to force competitors out.

The complaint comes two monthsafter the Sixth Circuit Court of Appealsupheld a ruling in a similar case thatUST must pay USD 1.05 billion indamages to Conwood, another com-petitor in the US moist-snuff market.

I N I TS COMPLA INT , Swedish Match cites,among other information, evidence thatcame to light during Conwood’s suc-cessful damage suit against UST;

• Stores exclusively selling UST’s snuffwere receiving thousands of dollars inbonuses, while those marketing com-peting brands were threatened withthe withdrawal of UST’s snuff.

• One retail chain signed a marketingagreement with UST in which it wasstipulated that competing productswere to be placed on the lowest

shelves, out of sight of customers.

• UST’s salespersons were awardedbonuses if they succeeded in eliminat-ing competing products from stores.Sales shelves were destroyed andadvertising signs were painted over ortorn down.

• In some cases, snuff cans were stolenand discarded and UST salespersonsplaced their own company’s productson shelves reserved for competingproducts. UST also manipulated salesstatistics so that retail chains underes-timated the popularity of competingproducts and reduced their ordersaccordingly.

»WE HAVE YET TO determine what sum wewill be demanding in damages«, saysBo Aulin. »UST’s actions have beendirected against all of its competitorsand the company has continued to actin this way, despite the verdict in favorof Conwood.« ■■

0

3,000

6,000

9,000

12,000

SALES AND OPERATING INCOME, JANUARY—MARCH, MSEK

2000 2001 2002

1,8651,6081,386

10,105

8,337

10,317

Sales Operating income

SALES, MSEK OPERATING INCOME, MSEK

Jan–Sept Jan–Sept Change Jan–Sept Jan–Sept Change2002 2001 % 2002 2001 %

Snuff 2,090 1,799 16 923 691 34

Chew. tobacco 1,023 1,028 0 311 278 12

Cigars 2,513 2,586 –3 411 362 14

Pipe tobacco/Accessories 618 697 –11 119 185 –36

Matches 1,268 1,254 1 177 134 32

Lighters 535 613 –13 60 74 –19

Other 2,270 2,128 7 –136 –116

Total 10,317 10,105 2 1,865 1,608 16

You can now subscribe to and order electronicservices via SwedishMatch’s website:www.swedishmatch.com.

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ertil Raihle fromSwedish Match andClaes Janzon fromÖhrlingsPricewater-

houseCoopers are key figures inthe process – Bertil Raihlebecause he works with theGroup’s financial reporting asGroup Controller at the HeadOffice, and Claes Janzon be-cause he is responsible for coor-dinating all 24 audit teams. Boththen report to their superiors –

Sven Hindrikes, the Group’s CFO,and the two regular auditors, Åke

Danielsson and Göran Tidström.They barely have time to catch their

breath after the AnnualGeneral Meeting beforework begins again inMay with planningmeetings. »At that time,we discuss whether weare going to focus thereview on any particularareas, perhaps in light ofany major structuralchanges in the Group, changes in legisla-tion or regulations or if the previousyear’s audit highlighted the need for anyspecial efforts,« says Bertil Raihle.

Such »themes« in the audit may

involve reviews of IT systems’ suitabili-ty and security, a special review of stockvalues or the invoicing system’s quality.»In a large Group like Swedish Match,the work largely involves systemreviews, rather than detailed inspectionof orders and invoices,« explains ClaesJanzon, who also has specialist expert-ise in US accountancy practices, whichis of special use to Swedish Match.

A C T I O N S O F T H I S K I N D are also taken,although more in the form of randomchecks. Auditors may, for example, visitwarehouses to check flows and the valua-tion of goods. However, system quality isemphasized – who is authorized to enter

data into the system, howis accuracy checked, howare warehouse flowslinked to order data,accounts receivable andthe sales ledger, and howare quality and the valueof the stock checked?Also important are thereview of financial trans-

actions and the evaluation of the risk theseinvolve, as well as the standard of theaccountancy principles employed and thedegree to which they are followed.

»As auditors, we are to ensure that

4 | S W E D I S H M A T C H I N S I D E | # 4 2 0 0 2

he Auditors’ Report may notlook much, with its brief,standard formulations, buteach precise word weighs

extremely heavily,« says Bernt Magnus-son, Chairman of the Board. »It isbacked by an enormous investment inman hours, correspon-ding to 16 MSEK eachyear, and by many yearsof experience and expert-ise both on our part andthat of the auditors.Auditors put their honorand their firm’s entirecredibility capital at stakein affirming its correctness. There is nogreater pledge. For auditors, credibilityis everything. The result is security forshareholders.«

The annual audit is the process

reviewing Senior Management’s per-formance in the task of managingshareholders’ assets. It is also the share-holders who, via the Annual GeneralMeeting, assign the auditors their task.Is it therefore not a problem that thePresident and the Board foot the bill

and, in practice, formu-late the assignment andact as the customer?

»No,« replies ÅkeDanielsson. »There is noconflict between whatSenior Management wantsus to do and what we areobliged to do. We pro-

vide support for management whilealso acting as independent reviewbody, with the duty of ensuring thatGroup companies follow manage-ment’s orders.«

»When I read the Auditors’ Report at Swedish Match’sAnnual General Meeting, I feel very clearly that I amfulfilling a commission of trust for the Group’s nearly100,000 shareholders. There is always a certaintension and formality in the air – it’s something of amoment of truth,« relates Åke Danielsson, SwedishMatch’s regular auditor together with Göran Tidströmand deputy auditor Claes Dahlén, all from theÖhrlings PricewaterhouseCoopers auditing firm. The40-line Auditors’ Report, never more, never less, is theculmination of an estimated 20,000 hours of auditingannually. This is on top of the process that involvesalmost everyone in the Group, from the Board to thesmallest stockrooms around the world. The ultimatepurpose is to ensure that the most reliable picture of»shareholders’ Swedish Match« is obtained.

Each word is significant

»For the auditors,credibility is every-

thing. The result is security for the

shareholders.«B E R N T M A G N U S S O N

T

»In a large companylike Swedish Match,

work largely involvessystem reviews,

rather than detailedinspection of orders

and invoices.«

20,000 hours of meticulous

The audit process at Swedish Match involves some 100 auditorsduring its most hectic phase between September and February.More or less continual review of calculations, control and reportingsystems is conducted by 24 audit teams in 15 countries.

Year-round audit process

MARCH/APRIL Preparation for AnnualGeneral Meeting. Review inaccordance with US rules (20F)with comprehensive documen-tation and special audit team.

APRILThe Annual General Meetingapproves the Income Statements andBalance Sheets, distributes profits anddetermines discharge from liability.Previous year’s operations reviewedin accordance with US rules (20F).

MAY/JUNEPlanning begins for thecurrent financial year.Audit teams are organized.

AUGUST Review process beginswith instruction distrib-uted to all companies.

SEPTEMBER Problems cataloguedand the focus of thereviews discussed anddetermined.

OCTOBER/NOVEMBER The review is in full swing withcontinual contact between HeadOffice and auditors.

DECEMBER Process continues andteams submit reports.

JANUARY Review of annual financial state-ments, reports from all audit teams.Internal Auditors’ Report and memo-randum. Consolidated accountsgroup works in parallel.

FEBRUARYBoard meeting regardingpress release on annualfinancial statements.Review of Annual Report.

BAUDITING YEAR

BERNT MAGNUSSON AND the Group’s audi-tors are agreed that bookkeeping is notan exact science. »And therefore, a pre-cise and objective view of a company’scondition does not exist. The importantthing is to try to achieve as much open-ness and transparency as possible.Shareholders and others must be able tosee what conclusions we have reachedand, preferably, why. Then one mustaccept that other conclusions are alsopossible.«

According to Bernt Magnusson, thismanifesto underlies the conservative»audit culture« at Swedish Match.»Long-term credibility is as importantto us as it is to the auditors.«

O N C E E V E R Y F O U R Y E A R S , theBoard conducts a procurementprocess for auditor services bysetting a list of requirementsand requesting bids. What arethe criteria for the auditingassignment at Swedish Match?

»With our broad, interna-tional operations, only themajor, international auditing firms are

suitable. Other requirements includeindependence, a strong combination ofgeneral expertise and specialist know-how, particularly at the auditing firm’sheadquarters in Stock-holm. And, again, anuntarnished reputationand credibility,« saysBernt Magnusson.

Auditors have beenhighly criticized duringthe past six months in thewake of the US corporatescandals at Enron andWorldCom. Could events like these hitSwedish Match?

Å K E D A N I E L S S O N A N S W E R S ,

»Society often has unrea-sonable expectations. Ourrole is clearly defined in theCompanies Act. We are totake those measures thatmay reasonably be demand-ed and which indicate anyproblems. However, the pri-mary emphasis of the audit

is not on uncovering fraud, and we have

no way of exerting power. The powerwithin the company lies with the Annu-al General Meeting, the Board and thePresident.«

Bernt Magnusson says,»We have reviewed ouraudit process to checkwhether or not we haveany of the loopholes andpitfalls of the type discov-ered in the US. However,this did not necessitateany action. A business isbuilt on mutual trust

between a large number of individuals.Protecting oneself against crooks anddishonest individuals would be diffi-cult without a degree of control thatwould turn us all into policemen, thuscreating an untenable working en-vironment.«

Swedish Match’s Board has decidedto establish an Audit Committee, con-sisting of three members, whose specif-ic tasks, responsibilities and authoriza-tion will be determined during the nextfew months. ■■

the company maintain control andworks ambitiously to limit risks in theiroperations,« Claes Janzon continues.

A F T E R T H E V A C A T I O N P E R I O D , work getsunderway as the 24 audit teams receivetheir instructions, five in Sweden, two inthe US, and the remainder concentratedto Swedish Match countries such as theNetherlands and India. In London, a spe-cial team conducts a review based on theUS rules. That review results in a »20F«document, an Annual Report, whichmust be submitted to the US Securitiesand Exchange Commis-sion. In total, some 100auditors are involved withthe review of all ofSwedish Match’s compa-nies around the world.

In November, the vari-ous audit teams submittheir reports. A total of400–500 pages, followinga strict template, pour into the Stockholmoffice by e-mail. Claes Janzon then com-piles reports for Bertil Raihle and SvenHindrikes. Meetings are held to discussunresolved issues and instructions foradditional work are then sentto auditors in the field.

The review of the annualfinancial statements beginsearly in January. All auditteams work intensively andwithin a few weeks reports onthe review are submitted fromall local companies. A Group-wide accountancy teamworks in parallel to compile the finan-cial statements for the entire Group. Onabout February 5, a report meeting isheld to finalize the financial statementsfor the full year. »We hold a number of

meetings in January and early February.Many late nights are spent resolvingquestions and fine-tuning the figures inpreparation for the Board’s meeting todiscuss the financial statements onabout February 10, in which the audi-tors participate.

At that point, the review of the Annu-al Report has already begun. That processprogresses during January and February.In addition, as a company listed in the US,Swedish Match is required to compile athorough 20F document, in accordancewith US GAAP accountancy standards

within six months of theclose of the financial year.In this context, the specialteam in London plays theprimary auditing role.

Bertil Raihle grabs theSwedish FinancialAccounting StandardsCouncil’s 350-page rec-ommendations from the

shelf and indicates a row of files, »Wehave to follow this too, about 4,000pages of US standards! It is extremelythoroughly thought out and detailed. Itforces a demanding intellectual pro-

cessing of the Report.«

O C C A S I O N A L L Y , T H E U S R U L E S

conflict with the Swedish ones.In Sweden, the principle of cau-tion is worshipped while thebasic US stance involves mar-ket evaluation. Swedish Matchmust therefore report in accor-dance with both systems and

explain any divergences. These arereported in a special note in the AnnualReport.

Obviously the auditing organizationobtains a very broad and deep knowl-

edge of the Group and its operations.»It is therefore natural that we use themfor a number of consultancy typeassignments. We need their assistanceon such matters as accountancy detailsin connection with acquisitions, adviceon tax issues, and the management ofcomplicated bookkeeping transactionsin international business. In addition,the auditors have extensive knowledgeof the reporting and control systems,which we are able to use in the ongoingdevelopment of our own administrativesystems,« concludes Bertil Raihle. ■■

»Top recom-mendation«»WHEN TRUST AND FA ITH D ISAPPEAR so does value«,says Göran Tidström using a quote made byChairman of the US Federal Reserve, Alan Green-span. As the Swedish Match auditor since 1987,Göran Tidström has made a major contribution tothe company’s own trust capital over the years.Acknowledged as a Swedish »super auditor,«with top international assignments, he gladlyemphasizes thecompany’s long-standing reputa-tion for »good«accounting.

»During SvenAndrén’s time asCEO, an auditingcouncil with highacademic com-petence was acti-ve, headed byProfessor Sven-Erik Johansson.Although Profes-sor Johansson was not an Authorized PublicAccountant, he possessed very great knowled-ge. The council identified and presented trickydiscussion points, ensured that managementworked with them and assumed responsibilityfor providing advanced solutions to problemsand checking the information released by thecompany to the capital market.«

»This culture is still very much alive in termsof the way in which the Board perceives thework of the auditors. Today, we work in a moreadvanced manner with and within managemen-t’s own reporting structure, which contributesgreater added value to the audit. As a result, theefficiency and value of the auditing process hasbeen continuously raised, which benefits boththe company and its stakeholders,« he says.

Following the corporate scandals in the United States earlier this year, capital marketexpectations in regard to auditing work are veryhigh. »The establishment of Auditing Commit-tees is expected to boost the quality of the exa-mination chain. I don’t have any views aboutwhether or not Swedish Match establishes sucha Committee. I can only state that to date theBoard has devoted such an interest to accoun-ting/auditing matters that in many respects italready does what the Auditing Committees arebeing set up to do,« says Göran Tidström.

That is a top recommendation!

Göran Tidström.

»As auditors, we are to ensure that the

company maintainscontrol and works

ambitiously to limitrisks in theiroperations.«

effort each year

»There is no conflict between

what Senior Mana-gement wants us

to do and what we are obliged to do.«

Å K E D A N I E L S S O N

The audit is under way year-round and the auditors feel at home inthe Swedish Match corridors. Shown are (from left) Claes Dahlén,deputy auditor, who works specifically with matters related toLights and Matches and Swedish Match foreign subsidiaries,Susanne Sundvall, who is a finance expert and also serves as audi-tor for the pension funds, Åke Danielsson and Claes Janzon.

S W E D I S H M A T C H I N S I D E | # 4 2 0 0 2 | 5

Bertil Raihle.

Bernt Magnusson.

6 | S W E D I S H M A T C H I N S I D E | # 4 2 0 0 2

he path to streamlined and moreefficient machine-manufacturedcigar production was staked out

two years ago. This is generating majorchanges in an industry that is still charac-terized by considerable craftsmanship, amyriad of different blends, products andpackaging types, demands for rapid deliv-ery and stringent quality requirements. It isalso a sector that has undergone compre-hensive restructuring and consolidation inrecent years. After being one of the mostactive companies in this process, SwedishMatch is now ranked among the world’slargest producers of cigars and cigarillos.

»We have completed many acquisitions,including a number of large ones, in the pastten years. Integrating all of the acquiredunits has required a great deal of energy.Now it’s time to initiate the second round ofinvestments – in more effective production.We are entering a period that will be hall-marked by proactivity,« says Peter Nilsson,head of the Continental Europe Division.

TH IS D IV IS ION CONTA INS four pro-duction plants – Houthalen andOverpelt in Belgium, Pandaan inIndonesia and Valkenswaard inthe Netherlands. It also includesjoint ownership of the produc-tion conducted in Germany byArnold André. Now all of theseoperations are being restruc-tured, a process that was initiat-ed in 1999 but which is nowgaining renewed momentum following thetransfer of all production in Belgium toHouthalen, and the relocation of certainother manufacturing activities to Indone-sia. These transfers include brands sold in

volumes that are insufficient towarrant machine production.The finish the products receivein the form of, for example,labeling, is currently carried out inValkenswaard in the Netherlands but willnow also be taken over by Houthalen.

Although the restructuring process willresult in the workforce in Belgium beingreduced by 160 employees through the endof 2003, the main reason for concentrat-ing all production under one roof is toachieve other benefits.

»Based on well-defined goals, all parts ofthe production chain are now working toaccelerate productivity and product flows,while cutting the lead-time from the suppli-er to customers. This will also enable us toreduce tied-up capital and will providescope for continued investments,« says NoëlJanssens, manager of the Houthalen plant.

The investments referred to by NoëlJanssens are the widespread measures toupgrade the machine park that are being

implemented in parallel withthe merger of the productionunits. At present, EUR 5 mil-lion has been allocated forinvestments in new equipment,such as a completely new pro-duction line and fine tuning andimprovements of productionmachinery. In turn, this processrequires a mobilization of theentire workforce in an effort toachieve continuous improve-

ments, since the machinery and otherequipment will be upgraded on site.

THE PR IMARY TOOL used for this work will bethe EFQM (European Foundation for

Quality Management) model introducedwithin cigar-production operations in1999. EFQM is an instrumentused by companies to assesstheir current position in effortsto become world class.

A walk around the Hout-halen plant provides a clearimpression of the distinctivenature and complexity of theproduction conducted there.Products include brands com-prising 100-percent tobacco –such as La Paz, Willem II andJustus van Maurik – and cigars whosewrapper consists of HTL (HomogenizedTobacco Leaf). Wings and Bellman arewell-known HTL brands.

As a result, the plant requires a largeamount of storage capacity. Inventories ofwrapper/ binder and filler tobacco corre-spond to seven to eight months of produc-tion, a level that is essential sinceHouthalen uses 18 different fillers andmany different wrapper and binder tobac-co, since all of them are in demand. Eachblended-filling batch weighs 2,500 to3,000 kg. The plant also has a large refrig-

erated building for the wrapper and bindermaterial delivered from Indonesia. The

various blends require consider-able handling and flow capacity.

In total, 162 different types ofcigars are produced, which aresupplied in 470 different formsof packaging, such as woodenboxes, tins and tubes. The prod-ucts also have to be affixed withvarious types of labels, bands,EAN codes, health warningstickers, cellophane and so forth,which means that more than

3,000 different items are delivered to cus-tomers as finished products.

THE A IM IS THAT the packaging/finishing ma-chine will handle all of the aspects of thefinishing process, thus replacing the fourdifferent machines currently used. In par-allel, work is under way to improve thecigar machines, also with the aim ofenhancing productivity and performance.

»We now know exactly what we wantto achieve, as does the entire organiza-tion,« says Wim Thijssens, head of theContinental Europe Cigar Operations. ■■

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Ambitious program to sharpen efficiency of cigar productionFollowing several years of acquisition-based expansion,Swedish Match’s cigar operations are now turning itssights towards production. A comprehensive efficiency-enhancing program tops the agenda.

Linda Reekman works at the cigar production plant in Houthalen.The machinery for cigar production is being substantially modern-ized, including enhancing the efficiency of the production machineryas well as installation of a completely new packaging line.

L IKE HOUTHALEN , IN BELG IUM, both plantsmanufacture machine-rolled cigars.

Machine rolled cigars manufactured inNorth America differ somewhat from thecigars manufactured in Europe. The cigarsfrom Santiago differ in that they arewrapped in single, complete tobaccoleaves, versus the patched leaves like inHouthalen. In Dothan the wrapper is madeof homogenized tobacco leaf (HTL), which

is equal to tobacco paper that is madefrom cigar tobacco byproducts. Addition-ally, US tradition is that most cigars haveclosed heads. With premium cigars a cigarcutter is normally used to cut the end,however for machine made cigars theclosed head is normally pierced. This differsfrom Europe where most large cigars arepre-cut during manufacturing.

The more labor-intensive production withwrappers made of natural leaf is located inSantiago and this has been the case sinceall North American manufacturing of naturalleaf cigars was transferred from Dothan toSantiago three years ago. While efforts inSantiago primarily involve increasingproduction efficiency by means of a com-prehensive program of improvements, atDothan, investments are also being made ingreater automation to increase productivity.

»In 2001, we invested the equivalent of35 MSEK in automation, mainly in a newpacking machine for large cigars, correspon-ding to 75 percent of production volume.«Explains Johnny Ghosal, Vice PresidentOperations and Supply for Swedish Match’splants in Dothan, Santiago and Owensboro.

TH IS NEW EQU IPMENT is unique to the indus-try. Traditionally, after a cigar is made, itundergoes seven additional stages before itis ready to be sent to the customer. Thisconsists of piercing a hole in the end of thecigar, placing the band on the cigar,wrapping in cellophane, orient each cigarand placing the cigars in packs of five or in

a 50-cigar box, over-wrap the packs andthen placing the cartons in cases. The newequipment automates all of these process-ing steps, to one continuous process,including various labeling.

Currently, the packing machine handlesmore than 50 different products, althoughthis number will increase as new productsare introduced.

»Thanks to the new equipment, we haveprogressed a step further than our com-petitors with regard to packing automa-tion,« says Johnny Ghosal. »The intention isto continue during 2003, and then it will bethe smaller cigars’ turn.«

Wim Thijssens.

Noël Janssens.

The Dothan automation project

SWEDISH MATCH’S CIGAR OPERATIONS

Plants Brands

Swedish Match Valkenswaard, NL La Paz, Willem II, Wings, Hofnar,Continental Europe Houthalen and Overpelt, Justus vad Maurik, Bellman, etc

Belgium, Pandaan, Indonesia

Arnold Bünde and Köningslutter in Clubmaster, Handelsgold, Vasco André (40%) Germany da Gama, Independence, etc

Swedish Match Dothan in the USA, Santiago in White Owl, Garcia Y Vega, etcNorth America the Dominican Republic

General Santiago in the Dominican Macanudo, Excalibur, Cigars (64%) Republic, Honduras Don Sebastian, etc

Rationalization efforts arecurrently under way at theproduction facilities in Dothan,in the US, and at Santiago, inthe Dominican Republic.

S W E D I S H M A T C H I N S I D E | # 4 2 0 0 2 | 7

Swedish Match share holding strongNAMES AND NEWS

wedish Match’s own website isan excellent source of newsabout the company, not to men-

tion its competitors and the sector as awhole. Here you can find, for example,press releases, financial reports and thepublication dates of future reports.

Other useful sources are the busi-ness media and share databases. Onelimitation regarding the media websitesis that they use the local language andtheir content may also have a local bias.An increasing number of media web-sites now charge a fee for the informa-tion they provide.

Information about a givencompany is also often providedon the websites of the exchanges onwhich the company is listed,although there may be a delay of 15–20minutes on share-price information.Swedish Match is listed in Stockholm(www.stockholmsborsen.se), Germa-ny (www.xetra.de) and New York(www.nasdaq.com). If you wish, youcan follow share price movements inNew York on your home computerafter the European exchanges haveclosed. Remember the ticker code:SWMA or SWMAY.

THE SECUR IT IES AND Exchange Commis-sion (SEC), lists all registrations ofcompany information in its databaseEDGAR (www.sec.gov/edgar). Unfor-tunately, the documents contain a lot ofvery formal legal language. The com-pany databases provide informationabout institutional shareholders, ana-

lysts’ assessments, and soforth. Among the betterdatabases are www.my.zacks.com and www.biz.yahoo

.com, which offer basic information inthe form of analyses and general com-pany information, in addition to shareprices and key ratios. Shareholderinformation is also available onwww.reuters.com and www.multexin-vestor.com. On both these sites, userscan set up their own share-watch pro-files.

www.corporateinformation.com andwww.hoovers.com are American data-bases that provide written analyses andcomparisons with other companies.

MSCI (www.msci.com) is a data-base for indexes. Swedish Match isincluded in the tobacco index but canalso be compared analytically with abroader spectrum of consumer-prod-ucts companies. ■■

New appointmentsAFTER THE FOCUS IN RECENT YEARS on smoke-less products, Swedish Match has secured aposition as the global leader in niche tobaccoproducts. This position provides a platform forthe future, in which expertise and productsparallel social trends. Considering these possi-bilities for continued growth and profitability,Peter Nilsson has beenappointed Senior Vice Presi-dent Business Development,effective January 1, 2003.Currently serving as head ofthe Continental Europe Divi-sion, based in Valkenswaard,the Netherlands, Peter Nils-son will serve in his new position as a memberof Group Management and will report to CEOLennart Sundén.

René den Admirant hasbeen employed as head ofthe Continental Europe Divi-sion as of January 1, 2003.He has years of experience inexecutive positions in thetobacco industry. Mostrecently, he was responsiblefor Japan Tobacco International’s operationsin Europe. René den Admirant will also be amember of Group Management and report toCEO Lennart Sundén.

swedishmatch.se votedsecond-best Nordic siteSWED ISH MATCH HAS WON the silver medal inWebranking™ 2002, Europe’s leading surveyand ranking of listed company websites. »Wedevote a great deal of time and energy to ourwebsite, so this is a very satisfying achieve-ment,« says Annette Kaunitz, responsible forthe Swedish Match site.

Swedish Match is now being rewarded forthe effort that has been invested in its site. TheGroup has the second-best site in the Nordicregion. Through the high priority assigned tothe project by corporate management, a com-petent web council and professional guidance,Swedish Match has successfully created awebsite that more than meets the highdemands placed on it by today’s capital mar-ket and other stakeholders.

Webranking™’s sets high demands for cor-porate websites. From year to year, the surveytakes into account new trends and new de-mands from the capital market. Accordingly, awebsite may never be considered as fullydeveloped. Instead, it must be continuallyupdated to maintain its topicality and credibili-ty. Swedish Match’s web council works con-stantly to meet the expectations of priority tar-get groups (analysts, shareholders and finan-cial journalists), mainly by satisfying theirdemands for a certain type of information andby making this information easily available andunderstood. As a result, Swedish Match’sfocus on the website has been combined withthe goal of maximizing user benefits for visitorsto the site.

There is also an international version of thesurvey, in which demands are based on aninternational perspective. The protocol alsodistinguishes itself slightly from the Nordic. OnNovember 6, 2002, the results were publishedin the Financial Times and once again SwedishMatch was among the medal winners, with athird place spot for the whole of Europe!

Share tips on the Net

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20

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60

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500

1,000

1,500

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1997 1998 1999 2000 2001

SHARE PRICE AND TURNOVER DURING FIVE-YEAR PERIOD

SEK MSEK

2002

Swedish Match Stockholm Exchange, SAX Stockholm Exchange, SAX

TOTAL RETURN

Total return, %

Jan–October 25, 2002 27.4

2001 56

2000 32

1999 4

1998 19

1997 15

May 15–Dec 31, 1996 9

(24% annual return)

KEY FIGURES

Earnings per share, SEK

2001 3.54

2000 2.76

Shareholders’ equity per share

Dec 31, 2001 11.73

Dec 31, 2000 12.22

SHARE PERFORMANCE, %

Jan 25–Oct 25, 2002

Swedish Match 26

SAX –39

he stock market remainedweak during the third quarter.Stockholmsbörsen (Stockholm

Exchange) declined somewhat duringthe period. The deep slump, continuingfrom the first half of the year was bro-ken toward the close of the quarter anda certain degree of recovery could besensed, particularly in the industriesthat had previously suffered heavy loss-es, such as telecom.

At the end of October, Swedish

Match’s share price stood at a level mar-ginally above that for the end of July.This slight increase in share price con-trasts with Stockholmsbörsen, which fellan average 5 percent during the quarter.

On October 25, the day followingthe publication of the interim report,the bid price was SEK 69.50. The high-est price noted during the most recentquarter was SEK 79, recorded inAugust. The highest price during theyear was recorded in April, when the

share hit a peak of SEK 86.From the start of the year, the

Swedish Match share price has risen 26percent, which is the best developmentamong the most actively traded shareson Stockholmsbörsen.

On the US NASDAQ exchange,where Swedish Match’s depositoryreceipts are listed, developments havebeen similar. To date, the NASDAQindex has dropped by 35 percent dur-ing 2002. ■■

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The Internet offers a quicksource of information aboutshares, including an abundanceof facts about companies anddetails of share prices.

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n the search for methods to reduce theharmful impact of tobacco, Swedenand the recent changes in Sweden’stobacco habits, have recently been the

focus of attention among researchers andpromoters of good health. During the pastsummer and early autumn, no less than fivelarge conferences have been held aroundEurope, which in oneway or another haveaddressed the harmfuleffects of smoking,nicotine dependenceand alternative smoke-less nicotine products.

THE FACTOR that has cre-ated most interest is the»full-scale experimentin health-impact reduc-tion« that is in progressin Sweden, which ishow Professor MichaelKunze from the University of Vienna de-scribed the situation to participants at theEighth Central European Lung CancerConference in Vienna at the beginning ofSeptember. Professor Kunze presented theresults of a study showing that the mortal-ity rate among patients suffering from lungcancer and other smoking-related cancer

diseases is lower among Swedish malesthan among Austrians. As a result, Swedenis the first industrialized country to reportany significant reduction in the mortalityrate among people suffering from tobacco-related diseases. Professor Kunze and hiscolleagues say that the explanation can besought in the major shift that has occurred

in Sweden away fromcigarettes to smoke-less nicotine products.At the end of 2000,this latter categoryaccounted for abouthalf of all nicotine con-sumption in Sweden.

» T H E S W E D I S H Experi-ence,« as this phenom-enon has becomeknown internationally,is based on the highconsumption of snus

in relation to cigarettes. This in turn has ledto several large epidemiological studiesbeing made. None of them have shown anylinks between Swedish snus and cancer.Several of the studies indicate that there isno excessive risk of cardiac infarct amongsnus users, as distinct from cigarette smok-ers. At the same time, it is generally known

that snus is a major help to many smokerswho want to quit.

Against the background of these studies,the debate has increasingly focused on snusas an alternative to smoking for people whoare nicotine-dependent. Until we have acompletely nicotine-free society, which isnot likely for some time, many public healthrepresentatives claim that it is better to takesnus than to smoke. Many argue that thiswill continue to apply in a reality where alarge group will never get over their addic-tion as long as nicotine exists. And, as not-ed, the advocates of a harm-reductionapproach are growing in number.

THE MOST RECENT EXAMPLE of this change inattitude was confirmed at the scientific con-ference on nicotine dependence in San-tander, Spain, at the beginning of October.One of the agenda items was devoted toSwedish »snus.« In an address, Clive Bates,from Action on Smoking and Health andone of Europe’s foremost opinion lobby-ists, proposed that the EU’s ban on snus belifted and that legislation be passed toinstead regulate the limits for undesirablesubstances in snus. ■■

The Swedish experience arousesinterest in research circlesIn a health context, the role of snuff (snus) as asignificantly better alternative to cigarette smoking has created attention at a number of major internationalconferences during the past half year. The experiencescited have mainly derived from Sweden.

I»Several of the studiesindicate that there is noexcessive risk of cardiacinfarct among snus users,as distinct from cigarette

smokers. At the sametime, it is generally knownthat snus is a major helpto many smokers who

want to quit.«

SWEDISH MATCH IN BRIEFSwedish Match is a unique company with a complete range of market leading snuff and chewing tobacco,

cigars and pipe tobacco – tobacco’s niche products – as well as matches and lighters. The Group’s global

operations generated sales of SEK 13,635 M in 140 countries in 2001. The Group has 14,343 employees.

Swedish Match shares are listed on the Stockholm Exchange (SWMA) and NASDAQ (SWMAY).

KEY FIGURES

MSEK 2001 2000

Net sales 13,635 11,533

Operating income 2,193 1,886

Operating incomebefore depreciation 2,863 2,429

Net income 1,228 1,144

Income per share after tax, SEK 3:54 2:76

Dividend per share, SEK 1:45 1:35

Return on share- holder’s equity, % 28.3 21.8

SmokelessTobacco

Swedish Match hasa broad presence inthe global market forsmokeless tobacco(snuff and chewing tobacco), with prominentmarket positions in the Nordic countries,North America and South Africa.

MARKET POSITION

Snuff: Market leader in the Nordic countriesand South Africa and the third largest player inNorth America.Chewing Tobacco: Market leader in NorthAmerica

Matches and Lighters

Swedish Matchmanufactures andmarkets matches andlighters globally. The products are soldin more than 140 countries.

MARKET POSITION

Matches: World’s leading manufacturer ofmatches and the only company with matchproduction and sales operations in all parts ofthe world.Lighters: One of the world’s three largestmanufacturers.

Cigars andPipe Tobacco

Along with smoke-less tobacco, cigarsand pipe tobaccohave been identifiedas a growth sector for Swedish Match. Theproducts are sold in large parts of the world,with particular emphasis on North America,Europe and South Africa.

MARKET POSITION

Cigars: World’s largest cigar company, with aproduct range that covers all price segments.Pipe tobacco: One of the world’s oldest andlargest producers of pipe tobacco.