October 07, 2019 - 5:32am EST by
2019 2020
Price: 399.00 EPS 24.1 27.8
Shares Out. (in M): 168 P/E 19.6 16.9
Market Cap (in $M): 6,773 P/FCF 19.6 16.9
Net Debt (in $M): 1,228 EBIT 5,052 5,837
TEV ($): 8,000 TEV/EBIT 14.7 12.8

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Swedish Match

Swedish Match is a world leader in spitless pouch tobacco (“snus”), a form of tobacco that is gaining in popularity across the globe. We believe that it is well-placed to expand in the United States through its new ZYN line of pouch nicotine, just as the general public is becoming increasingly sceptical about the health benefits of vaping.

The company is a remnant of the match empire built up by Ivar Kreuger during the early part of the 20th century, then called Svenska Tändsticks AB. After the Great Depression (still referred to as the “Kreuger crash” in Scandinavia), a large part of the company was liquidated. The new shareholders refocused the company on making matches and lighters for cigarettes. In 1992 the company was merged with the former Swedish tobacco monopoly AB Svenska Tobaksmonopolet and renamed Swedish Match.

The company has three main lines of business: snus (a moist powder tobacco in pouch format placed in the upper lip), other tobacco products (cigars and chewing tobacco) and lighters. Snus is the largest segment at 57% of operating profit vs 40% for cigars / chewing tobacco, with the remainder coming from the unprofitable match and lighter segment.

The main brand names include:

  • Snus: General, Göteborgs Rapé, Kaliber, Kronan, Ettan, Grov, Catch, G.3, G.4, The Lab
  • Nicotine pouches without tobacco leaves: ZYN, a nicotine alternative derived from tobacco but which doesn’t contain any tobacco leaves. Just as snus, it does not require spitting out saliva.


Roughly 37% of sales comes from the company’s legacy market in the Scandinavia (Sweden + Norway), while 53% of sales now comes from the United States.

  • The Scandinavian segment is enjoying slow but steady growth at close to +1-4% for volumes and another +1-3% for price/mix. Swedish Match has a market share of about 60% in Sweden and 50% in Norway but is completely dominant in the premium segment. Much has been said about increased competition, but the truth is that Swedish Match is still increasing both volumes and prices for an overall mid-single digit growth profile.
  • The US segment is focused on cigars, chewing tobacco and nicotine pouches. The US smokeless tobacco market is growing at about +6% per year.


The pitch is simple:

1)      We believe that Swedish Match is a high-quality company.

Brand loyalty is extremely high in the smokeless tobacco segment. Consumption of the product makes the brand connected to positive experiences, reinforcing brand perception. Potential health hazards from consuming poor-quality products leads to customer willingness to spend extra for brand names. The customer acquisition cost for products containing nicotine is low, since the addictive nature of the product is a constant reminder to repeat the purchase.

The company enjoys a ROIC of 63% and operating margins close to 40%. Free cash flow conversion rates have historically been around 100%. EPS growth over the past decade has been 8.6%. The dividend payout ratio during this period ranged from 40 to 135% of net income. Since the listing in 1996, the company via share repurchases shrunk its shares outstanding from 463 million shares to only 168 million shares.

2)      Smokeless tobacco is a growth industry and the stock should trade at materially higher level than zero-growth consumer staples companies.

Snus is a growth industry. Taking Sweden as an example, the consumption of snus has increased from about 50 million cans in 1970 to 300 million cans today. Today, 19% of Swedish adult men use snus daily. Volume growth has been roughly 5% per year in Sweden, 8% per year in Norway and 2% in the United States over the past 9 years.

Snuff and other forms of smokeless tobacco is clearly gaining market share from cigarettes and cigars, as can be seen from this chart on forms of nicotine in the United States. The global smokeless tobacco market is expected to grow 4.7% per year in the next five-year period, according to Mordor Intelligence. (https://www.mordorintelligence.com/industry-reports/smokeless-tobacco-market)

There are several factors driving this growth:

  • Studies have shown that cancer incidence rates among snus users were consistently lower than for cigarette users, implying potential health benefits from switching over to smokeless tobacco products. The data on the safety of snus goes back many decades and it is a product with proven track record in terms of safety compared to cigarettes. (https://www.sciencedirect.com/science/article/pii/S0273230013000287).
  • Surveys consistently show that over 90% of cigarette users believe that cigarettes cause cancer (source: UBS). This perception is likely to push cigarette users to safer alternates over time.
  • Putting a pouch under your upper lip is not as disturbing to people around you as smoking a cigarette and exposing them to second-hand smoke.
  • Several jurisdictions, including Sweden, have introduced bans on cigarette smoking in restaurants, bars and nightclubs to reduce the impact of second-hand smoke and the risk of fire hazards.
  • Many workplaces ban smoking inside the premises, forcing smokers to go outside whenever they want to light up a cigarette. Snus can be consumed at your desk and in contrast to snuff / “dip” it doesn’t require constant spitting.
  • Nicotine is a growth market. Nicotine dependence among American youth has increased since the popularity of vaping shot up in 2016 and 2017. The Center for Disease Control estimates that 28% of high school students used e-cigarettes in the past month.



3)      We expect the national roll-out of ZYN in the United States to accelerate non-Scandinavia nicotine pouch volumes. ZYN was close to a break-even level in 2018, so it will most likely start contributing positively on the operating profit level from 2019 onwards.

ZYN was introduced in the Western parts of the US in 2015. But the expansion accelerated from 1 April 2019 onwards with a plan to roll-out the product nationally. In the second quarter of 2019, Swedish Match reported that ZYN was available in 50,000 stores across the nation and the roll-out will most likely continue throughout the next two years.

Google search queries for “ZYN” across accelerated from April 2019 onwards, with a big spike in September 2019, coinciding with increased concerns among the general public about the health benefits of vaping.



Similarweb reports the number of website-visits to Zyn.com rising 8-fold over the past six months. It now has monthly website traffic of about 160,000 visitors. Considering how the website does not yet have e-commerce capabilities – it only provides addresses to stores that carry the product – we believe that such traffic should be considered meaningful.

Imperial Tobacco reported in a Wall Street Journal article that the growth in the US market for prefilled e-cigarettes slowed from +13% YoY in May to 2% YoY in August and has now turned negative – suggesting that users are switching away from vaping.

Anecdotal evidence that ZYN is catching on:

      “I vaped 55mg of nicotine everyday for about two years. Just switching because people dying on the news.”
      “ZYN is taking over the industry. I can’t believe how fast they got into every gas station.”
      “I work for Swedish Match in Owensboro, KY, and we can’t make this stuff fast enough!”
      “I’ve been addicted to tobacco since age 14, smoking cigs, dipping, vaping and after all this ime I finally found ZYN and haven’t used tobacco since. According to studies it has the same risk of cancer as nicotine gum (which is 0) so I’m super happy.”
      “I live near Seattle and they are in every convenience store. They are always almost out of every pouch but cinnamon.”
      “I can certainly see its attractiveness… If i was ever concerned vaping would get me fired, I would think about it, but vaping is so easy to hide. I would stealth-vape at my desk.”
      “This product changed my life. Finally off tobacco”
      “I love these for work cause I don’t have to spit.”
      “These are a great substitute… I highly recommend ZYN if you have trouble chewing nicotine gum like I do.”
      “Not just for dudes. I was smoking up to two packs of cigarettes a day. Started on this now I'm a non smoker. Love this stuff!!!”
      “It has been everywhere I’ve been and seems to be selling well”
      “[On competitor Velo] Hard pass for me too except the can is clearly better. Just tried the mint and no bueno. Back to cinnamon ZYN 6”

A few hints of ZYN’s early success were given by the CEO during the 2Q19 conference call: “Shipment volumes for ZYN in the US approximated 11.5 million cans in Q2, up roughly 5.5 million cans sequentially compared to shipments in Q1”, “the national launch markets appear to be trending consistently with how our early installs in the western region developed” and “I haven’t seen anything like this in my career in terms of consumer response”.

4)      The Trump administration has signalled its intent to ban flavored e-cigarettes (https://www.cnbc.com/2019/09/11/trump-to-consider-e-cigarette-policy-amid-outbreak-of-lung-disease.html)

In April 2019, the US FDA reported that 35 people had reported seizures after using electronic cigarettes over the past decade. FDA commissioner Gottlieb is pushing a proposal to restrict the sales of sweet-flavored e-cigarettes in convenience stores. Michigan state banned the sale of vaping flavored vaping products in early September. In New York state, governor Cuomo is planning to issue emergency regulation to ban the sale of flavored e-cigarettes except for tobacco and menthol. The Trump administration wants to pull vaping products off the market except for those formulated to taste like tobacco.

Even in the absence of a full vaping ban, we believe that the vaping health scare will push e-cigarette users to other smokeless alternatives such as ZYN nicotine pouches. The issue with trying to stop vaping is that your body is still addicted to nicotine, which leaves you only a few options: cigarettes, nicotine patches, chewing tobacco, nicotine gums, pharmaceuticals or snus / nicotine pouches.

Research shows that having unique flavors is a key reason why users choose vaping over cigarettes. A ban on flavored vaping products could therefore materially affect vaping consumption, and benefit alternatives such as nicotine pouches or other smokeless alternatives. Note that the ban on flavored tobacco products is only on e-cigarettes – not smokeless tobacco alternatives such as ZYN.

5)      On 11 June, the Supreme Court of Switzerland ruled that the ban on snus introduced in 1992 was illegal and unconstitutional, effectively legalizing snus in the country.

The Supreme Court argued that Swedish-style snus is less hazardous than other tobacco products allowed on the Swiss market today. The ruling meant that from 11 June 2019 onwards, snus is legal in Switzerland and can be marketed freely. Switzerland has a population of 8.4 million people – almost as many as Sweden and over half as many as Sweden-Norway combined. The addressable for market for Swedish Match has therefore expanded significantly. The company still only has 2 employees in their Swiss office in Luzern and is not in the process of hiring any new employees for the Switzerland office yet. ZYN has however been made available online in Switzerland, just as it has in Denmark, Czech Republic and the UK. Snus is banned in the EU, but nicotine pouches do not contain tobacco and can thus be sold. We expect regular snus products to be sold in Switzerland as well in the near future.

Risk factors

The greatest threat in the industry may come from government use of excise taxes. Over the past 20 years, the tax for a can of General has increased at a 9% CAGR. But according to the Swedish law for taxes on tobacco that was introduced in 2011, the tax rate will now only be increased in line with consumer price inflation. The current excise tax is 24-30% of the total retail price for a can of snus in Sweden. The fact that tobacco taxes are now tied to inflation via a specific formula lessens the risk of a major increase in excise taxes. However, in exceptional circumstances such as a war, poor government finances, etc – taxes on tobacco products could certainly increase further. The impact on volumes tends to be in the range of -0.4, suggesting resilient consumption but some negative effect on volumes from higher retail prices.

We should also not assume that ZYN will get the entire market for itself. The smokeless tobacco market is dominated by the Copenhagen, Grizzly and Skoal brands. However they are all “dip” tobacco and hence require spitting. ZYN’s unique selling point is that it is spitless and does not have a tobacco flavor, making it seem like a “cleaner” alternative for consuming nicotine. RJ Reynold’s is the largest competitor, followed by Altria. In the nicotine pouch segment, On and Velo are becoming popular as vaping substitutes. But ultimately, we believe the market will be big enough for all of them and we are not seeing any immediate slowdown in growth due to competition. We believe that ZYN will get roughly 5% of the smokeless tobacco market by the end of 2019 and closer to 7% by the end of 2020 as the national roll-out continues.

US cigar and chewing tobacco sales growth weakened significantly in 2Q19, but partly due to base effects. These declines should not be extrapolated. There has been noise from the FDA about a potential ban of flavored cigars. Up to 10% of Swedish Match’s EBIT could in a worst-case scenario disappear from a flavored cigar ban. However, even if flavored cigars are eventually banned, such a ban could potentially include menthol-flavored cigarettes, leading the 20 million Americans who currently smoke menthol cigarettes seeking smokeless alternative such as ZYN. We believe that the FDA and the Trump administration is primarily focused on health hazards of e-cigarettes at this point, though we will certainly follow the developments in the flavored cigar segment as well.


The potential for a successful roll-out of ZYN is not priced in, in our view. The stock currently trades at 15.3x trailing EV/EBIT and 13.3x on 2020e EBIT. This compares to a historical median multiple of 14.6x. The sell-side expects high single digit top-line growth to continue for the foreseeable future.

A few potential reasons why the stock is trading at lower-than-average multiples.

  • A weakening Swedish Krona
  • Guilt by association: Swedish Match might be seen as a dying tobacco company even though the growth prospects of snus are materially better than those of cigarettes
  • Swedish investors may not be as attuned to developments in the US market as Americans would be covering a domestic company
  • The trend towards ESG investing may have caused institutional investors to divest their stakes in the company
  • Risk on the flavored cigar segment from the flavored tobacco ban


Our forecast is more bullish than the one produced by sell-side analysts. Swedish Match’s nicotine pouch sales outside of Scandinavia was 11.5 million cans in the second quarter of 2019. But that number was based on an average store count of 33,000 stores by the end of March and 55,000 stores by the end of June (average 44,000). The store count by the end of 2019 will be closer to 60,000 and per-store sales volumes are likely to rise as well. We therefore believe run-rate sales by the end of 2019 will be 50% higher than 2Q19 and closer to 100% higher for the full year 2020. Each can retails for roughly US$4 on Northerner.com, suggesting a run-rate revenue of US$300 million for 2020 excluding tax. The entire Swedish Match as a company had sales of US$1.5 billion over the trailing twelve months, so it is not difficult to imagine a significant impact on Swedish Match’s top-line growth from the launch of ZYN.

Big picture-thinking:

  • The population of the United States is 20x greater than that of Norway-Sweden. It is therefore reasonable to believe that a successful roll-out of ZYN could materially impact the company’s top- and bottom-lines. Prior to the launch of ZYN, the US snus market had been growing at roughly 26% per year. (https://cstoredecisions.com/2019/04/29/smokeless-far-from-snuffed/)
  • Smokeless tobacco is a US$7 billion industry in the United States. If ZYN manages to capture a 5% of the market by the end of 2019, that would indicate run-rate dollar sales of US$350 million, representing roughly 25% of Swedish Match total sales in 2018. A successful roll-out of ZYN would therefore accelerate growth significantly.
  • We believe that the impact from a ban on flavored tobacco products on the smokeless tobacco market is likely to be significant. A 2018 study showed that 11 million Americans used vaping products in 2018. The number of individuals vaping should be significantly higher at this point – perhaps even as high as 15-20 million. When Canada banned flavored cigars in 2010, 58% of existing users moved on to non-tobacco products rather than continue smoking cigars or cigarettes. If 25% of those who vape move on to non-vaping products, and out of those just 10% move to smokeless tobacco, then we could be looking at half a million of potential new customers. If you assume each uses 4 cans per week then that would be equivalent to 104 million cans a year, worth somewhere around US$400 million per year. These assumptions are – if anything – too conservative. If there is a major backlash against vaping, the numbers could quickly add up.
  • While we wouldn’t necessarily buy the stock on a vague TAM narrative alone, it indicates just how large of a potential there is in the US market for Swedish Match. The risk is mostly to the upside.


According to our initial estimates – which are subject to revision as the roll-out of ZYN continues – we expect an EBIT of SEK 7.9 billion by 2022, implying a prospective EV/EBIT of 10.0x. Assuming a 14.6x EV/EBIT multiple in line with history, we see an upside of +54% in the next three years and +62% including dividends. While a double-bagger may be out of reach, we consider the risk-reward to be tilted towards the upside given the stability of the business and relatively modest multiple.

Appendix. Health outcomes of long-term usage of snus

Most oral forms of tobacco have significantly lower risk of adverse health outcomes than cigarettes (http://www.lakartidningen.se/Klinik-och-vetenskap/Klinisk-oversikt/2018/10/Skademinimering-ar-ett-omdiskuterat-alternativ-for-dem-som-inte-kan-sluta-roka/)

This study from University of Surrey suggests little support for any adverse major health effects of snus. (https://www.ncbi.nlm.nih.gov/pubmed/21163315)

The meta-study did not find sufficient evidence of a higher relative risk of snus use on health outcomes (https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(17)32366-8/fulltext)

There have been zero deaths associated with the use of snus, whereas the deaths from smoking exceed 6 million individuals per year, according to The Lancet (https://www.aftonbladet.se/nyheter/a/5m5LE/studie-inte-ett-enda-dodsfall-kopplat-till-snus)

No statistically significant associations between snus use and colorectal cancer (