October 26, 2011 / 1:48 PM / 6 years ago

UPDATE 2-Marketing costs hang heavy on Swedish Match

(Adds detail, background, CEO, analyst, updates shares)

* Operating profit 983 mln SEK vs 993 mln forecast

* Snuff margin 49.2 pct vs consensus 48.9 pct

* U.S. cheap cigar volumes grew 55 pct

* U.S. snuff sales, profit down

By Anna Ringstrom and Love Liman

STOCKHOLM, Oct 26 (Reuters) - Swedish Match is to make a further push into the U.S. market with Swedish-style moist snuff and take on rivals such as Altria and Reynolds American, the group said on Wednesday, after a small rise in core quarterly earnings.

The company said it also aimed to gain a foothold in the Russian market.

Its key product is moist snuff -- pouches of tobacco that are put under the lip. It is the largest moist snuff player in Sweden, where the product is known as snus, and third-largest in the United States.

One way it wants to differentiate itself is to grow sales of Swedish-style snus in the U.S. market. Snus is pasteurised while the most common U.S brands are fermented.

“The trend with international investments in snus, much of it in the U.S, will continue. Based on the response from consumers and stores, we will increase our concentration on Swedish snus,” said chief executive Lars Dahlgren.

Shares in the group were down 0.95 percent by 1226 GMT, lagging a broadly higher Stockholm market.

Marketing investments in Swedish-style snus in the U.S. increased significantly in the third quarter from a year ago, Swedish Match said in its earnings report, which showed a decline in the snuff margin.

Dahlgren told Reuters the group, whose rivals include BAT , would further accelerate its push for Swedish-style snus internationally.

A venture with Phillip Morris , SMPM International, would in the fourth quarter trial Swedish-style snus in the Russian city of St Petersburg, after tests in Taiwan and Canada, he said.

CHEAP CIGARS

Swedish Match’s small rise in quarterly profit, excluding costs for a plant closure, was helped by growing sales of cheap cigars in the U.S. and snuff in Scandinavia.

Operating profit fell 6 percent to 983 million crowns ($150 million), just below the mean forecast for 993 million in a Reuters poll of analysts.

But stripping out the top-end cigars and pipe tobacco operations of Scandinavian Tobacco Group (STG), profit grew 4 percent, which analysts said roughly matched expectations.

The profit margin for snuff, which makes up more than half of operating profit, fell to 49.2 percent from 50.4, but overshot a consensus forecast for 48.9 percent.

Dahlgren said profit and volume for the product grew in Scandinavia, where Swedish Match is market leader.

U.S. profitability fell due to lower shipments of moist snuff and increased marketing investments for Swedish snus.

Swedish Match said volume at its second key business besides snuff, U.S. mass-market cigars, spiked 55 percent with local-currency turnover up more than 25 percent.

In the fourth quarter, Dahlgren told Reuters, U.S. cheap cigar volume growth would land at around 10 percent.

In a conference call with analysts, Dahlgren cautioned of a slowdown next year: “We plan for growth in our mass market cigar business in 2012 but will not be able to repeat 2011 growth.”

Credit Suisse analyst Rogerio Fujimori said in a note to clients: ”Excluding unusually high restructuring charges at STG, overall performance was in line to slightly better than we expected.

“U.S. snuff competition remains difficult, but momentum for its core Scandinavian snuff and U.S. mass cigars remain solid.”

Last year, Swedish Match bought 49 percent of STG then transferred all cigar and pipe tobacco operations to it, except its fast-growing U.S. mass-market cigars business.

Swedish Match, whose main markets are Sweden, Norway and the U.S, repeated the market for snuff would grow in volume terms this year.

$1 = 6.554 Swedish Crowns Reporting by Anna Ringstrom; Editing by Erica Billingham and David Hulmes

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