Swedish Match's (SWMAF) CEO Lars Dahlgren on Q2 2014 Results - Earnings Call Transcript

Jul.18.14 | About: Swedish Match (SWMAF)

Swedish Match AB (OTCPK:SWMAF) Q2 2014 Earnings Conference Call July 18, 2014 2:45 AM ET

Executives

Emmett Harrison – Senior Vice President of Investor Relations and Corporate Sustainability

Lars Dahlgren – President and Chief Executive Officer

Marlene Forsell – Senior Vice President and Chief Financial Officer

Analysts

Casper Blom – Handelsbanken Capital Markets

Andreas Lundberg – ABG Sundal Collier

Anders Hansson – Danske Bank Group

James Bushnell – Exane BNP Paribas

Kate Kalashnikova – Joh. Berenberg, Gossler & Co.

Kevin V. Dreyer – GAMCO Investors, Inc.

Operator

[Starts Abruptly]

Emmett Harrison

Good afternoon, this is Emmett Harrison, Senior Vice President of Investor Relations and Corporate Sustainability. Welcome to the Second Quarter 2014 Results Telephone Conference for Swedish Match. Lars Dahlgren, President and Chief Executive Officer, is joined today by Marlene Forsell, Chief Financial Officer, and myself.

The conference call should last about an hour and will include an overview by Lars Dahlgren and a review of the financials from Marlene Forsell. A question-and-answer period will follow. A shortened version of our investor kit accompanies this presentation via webcast and a complete investor kit is available in the Investor Relations section of our website, swedishmatch.com.

During today's conference call we will discuss certain items which may constitute forward-looking statements. Because such statements deal with future events they are subject to various risks and uncertainties. Although management believes that its expectations are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. Risk factors are outlined in the latest Annual Report, which is available on our website, swedishmatch.com. Swedish Match assumes no obligation to update information concerning its expectations.

This conference call is being recorded and the recording will be published on the Swedish Match website.

I would now like to turn the conference call over to Lars Dahlgren

Lars Dahlgren

Thank you, Emmett, and good afternoon, everyone. For the second quarter of 2014 Swedish Match delivered sales growth of 4% with gains in product areas Snus and moist snuff other tobacco products and in the distribution business. Sales in our lights product area were down.

Operating profit from product areas in the second quarter amounted to SEK862 million, down 1% from SEK871 million in the previous year. Higher operating profit in the Snus and moist snuff product area substantially offset declines in the other areas. New operating margin excluding Scandinavian Tobacco Group was 25.8% versus 27.1% in the second quarter last year.

Operating margin for our product areas excluding other operations was 39.3% versus 39.8% in Q2 last year. There were minimal currency translation impacts in the second quarter versus year ago. Operating profit including our share on net profit from Scandinavian Tobacco Group, but excluding larger one-time items amounted to SEK941 million, down a bit less than 3% from SEK966 million in the second quarter of 2013.

Earnings per share for the first six months was SEK6.18 million compared to SEK6.24 million last year excluding one-time – larger one items. Within Snus and moist snuff product area sales revenues for Swedish Match Snus and Scandinavia were up by 5% in SEK in the second quarter versus the comparable quarter of the prior year.

Overall snuff shipment volumes in Scandinavia were up by close to 5% versus Q2 last year. On an underlying basis adjusted for different timing of the Easter between the years the estimated volume growth for Swedish Match Snus was 2% in the quarter. Volumes increased in Sweden and Norway as well as in Travel Retail. Sales and volume growth were positively impacted versus prior year on timing of shipments and we will expect Q3 to be a more challenging comparison versus year ago.

In Sweden, price mix effects were impacted by a higher of share of low price products in the portfolio as well as lower prices from the repositioning of the Kronan pouch products, partially offset by small price adjustments on other brands in September of 2013.

In Sweden, using Nielsen data, excluding tobacconists, our market share for Snus in value terms was 76.9% in the four-week period ending June 15, unchanged from 76.9% for the preceding four-week period and down from 78.7% in the corresponding four-week period last year Our market share in volume terms was 69.9% down from 70.3% in the preceding four-week period and down from 72.4% in the corresponding period last year.

Based on our own segmentation on Nielsen data for the four-week period ending June 15, Swedish Match had a volume share of 94.1% of the premium segment and 37.5% of the value segment. Our share of the premium price segment was down somewhat from the prior year corresponding period, while our share in the value segment was virtually unchanged.

The Value segment accounts for 42.8% of the Swedish market in number of accounts up from 39.9% in the corresponding period last year. With regard to pricing, last September is Swedish Match took modest price increases across the portfolio apart from the Kronan brand and this brand was in the declining trend.

During the second quarter we decided to strengthen their competitive positioning on Kronan by improving the visibility at retail, secure listings for smallest SKU and affecting a price decrease for the pouch product range. After a rapid decline in Kronan’s share of both the total market and the value segment in 2013 Kronan share in 2014 is much more stable.

Concerning tobacco taxes in Sweden, while the current government has proposed higher tax increase of Snus and for cigarettes in their preliminary budget for 2015 we note that this has created a relatively large debate in media, and the opposition parties have indicated that they would propose a more balanced proposal. The elections in Sweden are in September of this year.

In Norway, according to Nielsen our market share in value terms in the latest four-week period ending April or June 15, was 60.2% versus 60.6% in the preceding period and compared with 63.6% in the corresponding period last year. Total market increased by about 7% in the second quarter versus Q2 last year.

During the second quarter, Swedish Match consumption volumes are estimated been up by about 2% versus same period last year. While the indicated 2% volume growth in itself is positive, we are not pleased with the share erosion and have strong focus on the Norwegian market. A current example of an action is the introduction of enhanced products under the lab Fresh Product range and the activity level remains high throughout the year.

In the US, Swedish Match moist snuff shipment volumes were down by around 7% versus prior year second quarter. Partially attributable to the difference in facing of promotion between the years, for the sales and operating profit decline. Swedish Match estimates its volume share of the U.S. moist snuff market to be in the range of 9% with good volume development in the growing pouch segment.

The pouch segment in the U.S. now makes up close to 15% of the moist snuff market and has been growing faster than the category growth rate over the past several years. Another fast-growing segment is for larger packaging formats, and here we continue to see good growth for our Longhorn tub.

General Snus in the U.S. is now available in more than 24,000 stores. For the remainder of 2014, we will focus on adding distribution in selected high-quality outlets, and the pace of store expansion is likely to remain modest during the year. With the current plans of expanded consumer engagement and brand-building activities, the operating loss for the remainder of 2014 and for all of 2014 is anticipated to be somewhat higher than in 2013.

During the second quarter shipment volumes were down year-on-year on a net basis. This was due to product returns as well as rapid distribution efforts in the first half of last year affecting comparisons. And the rapid increase of store count in 2013 average turn rates decline due to typical low initial turns on new stores. Turn rates since the beginning of 2014 have however been showing upward trend.

General Snus is now approximately a 11% of the U.S. Snus market according to Nielsen data as well as market data provided by distributors indicate that general is clearly the fastest growing Snus brand in the U.S. during this year. On June 11, Swedish Match announced that – we have submitted a Modified Risk Tobacco Product application to the FDA. The application relates to sub-brands in the General Snus product line. Based on extensive Swedish and international evidence on the health effects of Snus, Swedish Match seeks permission to use warning labels that differ from mandatory warning labels on other smokeless tobacco products marketed in the US.

In other tobacco products businesses cigar volumes increased by 9% versus second quarter over the prior year. Higher volumes primarily came from our natural wrapper Game by Garcia Y Vega products as well as for Jackpot branded product launched in the fourth quarter last year. Sales increased less than volumes in percentage terms and operating profit for cigar was down as the more promotional product mix versus a year ago adversely affected the gross margin.

For chewing tobacco, second quarter chewing tobacco sales were below the second quarter of 2013. Operating profit however improved from lower overhead costs partly attributable to timing effects of certain costs between the years and better pricing. After and exceptionally strong first quarter and our volumes were up year-on-year. Volumes in the second quarter for our own brands were down close to 8%.

In the chewing tobacco category has historically declined in the range of 4% to 7% per year, and volumes for our own brands for the first six months of this year are down by about 3%. Contract manufacturing volumes were also lower in the second quarter compared to the second quarter of the prior year.

In the lights product area, sales were down in local currencies for both lighters and matches and lower volumes. Lighters had higher operating profit in local currencies somewhat operating profit declined from matches. Matches suffered from a weaker country price mix and lower volumes. Comparables versus prior year for the second half of this year for our lights business are challenging partly owing to strong shipments and advertising lighters in the previous year.

In addition to matches and lighters, our lights reporting segments includes the sale of certain complementary products. In Brazil, we sale razors, batteries and energy efficient light bulbs under the Fiat Lux and Feudor [ph] brands. Currently we are preparing for limited test of e-cigarettes produced by a third-party and served under the Cricket brand name for the Russian market.

Sales and expenses related to this test will also been included in the lights reporting segments. Sales in other operations for the second quarter amounted to SEK1.74 million up from SEK976 million in last years second quarter, with the timing on Easter favorably affecting the comparison. Operating loss for other operations was SEK28 million in the quarter and SEK22 million in the second quarter of 2013.

STG’s performance during the first six months has been relatively soft due to tough market conditions in several markets. EBITDA which was burden by restructuring charges and the number of costs from temporary nature decreased to DKK507 million compared to DKK556 million in the first six months of the prior year.

Adjusted for currency in one-items the EBITDA for the first six months was in line and with the comparable period of the prior year. For the second half of the year, we anticipate a clear improvement compared to the first six months. Swedish Match share of net profit in STG for the second quarter amounted to SEK7 million to SEK8 million compared to SEK95 million in the prior year.

Now, I will hand over to Marlene for some more comments on the financials.

Marlene Forsell

Thank you, Lars. For the second quarter, exchange rate had a minimum segment sales and operating profit comparisons. The Swedish krone was somewhat weaker than in prior quarters, notably versus the Norwegian krone and U.S. dollar. Overall, there was negative translation impact on sales of SEK5 million for the second quarter primarily taking place within [indiscernible] and mainly due to weaker Brazilian real.

The total translation effect on operating profit was a positive SEK1 million in the second quarter. At current spot rates we would expect to see some positive currency effects on both sales and operating profits going forward. Net finance costs for the first six months amounted to SEK261 million compared to SEK274 million in the previous year due to decreased average debt levels and lower average interest rates.

As of June 30, 2014 the interest-bearing debt was SEK10 million versus SEK10.5 million at December 31, 2013. For the first six months, the reported tax rate was 20.4%, the underlying tax rate was 22%. We estimated full year 2014 tax rate, excluding one-time items, associated companies and joint ventures to be around 22%.

And some brief comments on cash flow and balance sheet. Cash flow from operating activities for the second quarter amounted to SEK1.921 billion compared SEK1.199 billion in the second quarter over the prior year. The cash flow from operations increased compared to the prior year mainly as a result of positive changes in working capital and also lower income tax payments. The large profit cash flow from working capital is primarily due to timing cycle exercise tax paid and account receivables and payables.

Net cash used in investing activities amounted to SEK158 million versus SEK30 million in the first half of 2013. Last years net cash flow from investing activities including additional purchase price payments relating to the parcel of land sold in 2007 and the divestment of Swedish Match UK in 2008 in total SEK166 million. We expect that investments in tangibles and intangibles for the full-year of 2014 will be approximately SEK300 million.

During the first six months of the year SEK68 million has been transferred to the shareholders by means of share buybacks all occurring in the first quarter at June 30, 2014 Swedish Match held 1.4 million shares corresponding to 0.7% for the total number of shares. The number of shares outstanding net at June 30, 2014 amounted to 199.1 million. Call options corresponding to 0.7 million shares exercisable through February 2015 were outstanding as of June 30, 2014.

The net debt declined to SEK8.214 million from SEK8.308 million at the end of 2013. And the net debt in relation to EBITDA excluding share of profit in STG is 2.4 for 12 months period ending June 30, 2014.

During the first half of the year, we issued no new bond loans and during the first quarter we have repaid loans of SEK405 million. During the remainder of 2014, SEK460 million of loans was due for repayment half in September and half in December.

The average maturity duration of the bond portfolio is now 3.7 years and the weighted average interest on the bonds is 4.7% with about 95% over the portfolio at fixed interest rates.

And I will now turn over the conference call back to Lars.

Lars Dahlgren

And I think operator that we can go ahead and open the floor for questions and answers.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Casper Blom from Handelsbanken Capital. Please ask your question.

Casper Blom – Handelsbanken Capital Markets

Thanks a lot, and thanks for taking the question. A couple of things from my side. Starting off with STG where it seems that there are these restructuring things burdening the earnings at the moment. Do you have any insight to when do you expect to see the results of these restructurings in STG. Let’s start with that.

Lars Dahlgren

Hello this is Lars here. Part of the restructuring cost are the one-time cost – in this year relate to restructuring of the supply chain, which is a very complex and ongoing projects are changing the footprint on the supply chain, but where you also start seeing benefits in this year. Then there are some other items of one-time nature that are not pure restructuring. And they actually relate to inventory write-offs. But inventory write-offs on, what I would call growth projects that haven’t materialized. So it’s sort of say new ventures that was an upside and not an inventory write down existing sort of ongoing products line. But unfortunately those projects did not materialize as planned and we had to take some inventory write downs.

Casper Blom – Handelsbanken Capital Markets

Okay. Then I noted your comment with regards to testing the sale of e-cigarettes in Russia. Maybe you could elaborate a little more on this and whether this means that you might be moving into this area in a broader scale also?

Lars Dahlgren

We are following in the development of e-cigarettes and we want to learn more and understand better we have a very good distribution platform together with our distributor in Russia and the express interest to evaluate this opportunity since we have a very strong brand name in Cricket.

And we thought that was a good idea to do that jointly together with them to gain hands on experience and insights into the category and as I said then we evaluate and we follow and including of course on regulatory and scientific developments. Because you should remember that comes to e-cigarettes as opposed to Snus where there is a very long track record of – and long experience of epidemiological data that supports the margin on long-term health effects of Snus and moist snuff cigarettes for e-cigarettes there is not the same type of scientific platform the long-term effects and so we are evaluating and we are following.

Casper Blom – Handelsbanken Capital Markets

May be then just as a final question, if you have any comments with regards to the proposed combination of rentals in Lowry [ph] lots whether you see that in anyway having impact on your business maybe as if especially to rentals is basically with that project is that a focusing on Snus and snuff in the U.S.?

Lars Dahlgren

Yeah, I prefer not to speculate on those cannon things and I wish them all good luck to him it’s a big transaction.

Casper Blom – Handelsbanken Capital Markets

Okay, thanks a lot.

Operator

And the next question comes from the line of Andreas Lundberg from ABG Sundal Collier. Please ask your question.

Andreas Lundberg – ABG Sundal Collier

Hi, good afternoon, Andreas with ABG in Stockholm. I have a question on the chewing tobacco business, strong earnings again despite. I guess the 10% lower shipments, I guess this potentially driven by the very strong first quarter, but what you think is implied for the second half or underlying performance in that business? Thank you.

Lars Dahlgren

Chewing tobacco, there are quarterly fluctuations as we know in the chewing tobacco business, but we are encouraged by relatively strong performance this year and also actually last year as well in – as I said our volumes are down 3% and the relation to historic category declines that is relatively strong. And but it’s the declining category and we manage it has sufficiently as we can. But I would expect to see a more normal volume type of development for the remainder of this year. And then when it comes to the second quarter and isolation there was a bit of timing on the overhead costs. So it’s better to look at the six months data, but which are encouraging with increased profitability.

Andreas Lundberg – ABG Sundal Collier

You also had a strong year the last year right, so anything you know that has changed in the marketplace?

Lars Dahlgren

Its we note that you know the category decline – yes it is slightly lower than the historic trend whether that is temporary thing or more of a long-term trend I think remains to be seen.

Andreas Lundberg – ABG Sundal Collier

Okay. Can I also ask on the Travel Retail Snus volumes in Scandinavia the growth there is due to the anniversary of last years large decline for or what’s driving those volume gains. Thank you.

Lars Dahlgren

Well, I mean the Travel Retail market normally naturally the reflection of the rest of the Scandinavian market and including finished consumption. So it’s basically Swedish, Norwegian and the finished consumption to a very large extent. And then – so and as the overall categories Scandinavia is doing well. So that’s the underlying Travel Retail market area.

And then up until May of this year we have had this distortive effects where as May of prior year when we implemented the tax relabeling on the entire assortment. We saw that volumes went down quite dramatically which clearly suggested that some of the volumes that previously had been sold in Travel Retail where then imported into primarily the Swedish market and so there – and since May – on our last year we anniversary best effects. So we don’t have those artificially difficult comps in that business that we had up until May.

Andreas Lundberg – ABG Sundal Collier

Okay. And finally maybe for Marlene could you just remind us about your year-end policy or year end targets? Thank you.

Marlene Forsell

Sorry, the year end target on the financial policy.

Andreas Lundberg – ABG Sundal Collier

Sure.

Marlene Forsell

Yes, I mean we are having I mean we have speaked with our financial policy for long time I mean its tough to [indiscernible] and returning cash not need for the business, shareholders and we ended up that 2.4 net debt to EBITDA and that is in relation and to be rating with, we find also relevant for the optimize act. So, I mean, somewhere in between them to below 3 and the 2.4.

Andreas Lundberg – ABG Sundal Collier

Thank you.

Marlene Forsell

Around 2.4.

Andreas Lundberg – ABG Sundal Collier

Thank you.

Operator

The next question comes from the line of Anders Hansson from Danske Bank. Please ask your question.

Anders Hansson – Danske Bank Group

Hi, Anders Hansson here. Two questions on mass market cigar test after Q1 you said that the deep discount segment didn’t really grow much in the quarter. And I was wondering did we see the same pattern in Q2. You talked about this competition but is it driven by the very low end or just within natural wrappers?

Lars Dahlgren

Very similar pattern to Q1 that the deep discount segment is there, it’s the reality but we haven’t seen it’s growing much in the second quarter. But on the other hand in the rest of the market competition remains very intense and I’d say it’s more so the HTL cigar is even than the natural wrappers and it’s particular in the HTL cigar segment where it’s been increasingly intense.

Anders Hansson – Danske Bank Group

Okay, thanks. One more on mass market cigars, Lars you – I saw your quote with the local news agency, where you said that you expect decent volume growth in the second half assuming we continue to gain fair in natural wrappers. And also, just wondering on what is decent given the very different comparables we have between the quarters especially with Q3 last year being think down a lot, 9% up in Q2 was at decent performance?

Lars Dahlgren

I think 9% is very decent, I didn’t give any volume forecast as to be clear here. When I said is that for the first six months we have been delivering on our strategy to focus on the natural leads segment which we think is very attractive segment long-term and we have taken substantial more of a share within that segment.

That is the result behind our volume growth and we haven’t changed our strategy and therefore we haven’t changed our ambition that is to continue to grow share there, but of course also develop as well as you can in the HTL segment and we also have Jackpot out there. So if we have delivering on our strategies we should see these in growth also in the second half.

Anders Hansson – Danske Bank Group

Okay, thank you.

Operator

The next question comes from the line of James Bushnell from Exane London. Please ask your question.

James Bushnell – Exane BNP Paribas

Hi, thank you. First we have quite one on the e-cigarettes in Russia, you mentioned you had good distribution there. Are you able to tell us roughly how many outlets you have reach too? And also can you remind as we don’t know [indiscernible] distributor are they also cigarette distributor one of the large ones or is it someone else. And then my second question is on Norway, share trends obviously not great. Could you remind us how much of the market is lose versus pouchs? And then within pouchs why do you think you are losing share to imperial and what can you do about it. Do you expect these new product launches to rectify that situation? Thanks.

Lars Dahlgren

Yes, when it comes to Russia, we are presented the concept of the trade and so its not out yes we expected to be out in during this quarter available for consumers at retails. And we will get back to the number of stores and so forth, but its not, it’s a test launch, it’s not the massive launch across Russia or across Moscow so it’s a limited test. But we’ll speak more about it, when we are basically out in the market.

And in terms of our partner distribution there, it’s a local Russian company that we worked with for many, many years to grow our lighter business and very successfully. So to create Cricket as the leading premium and disposable cigarette lighter brand on the Russian market and the vast majority of their business is lighters and then they also distribute some cigars and other products. But it’s not of the big, big guys.

When it comes to Norway to my recollections, lose is down to 16% of the market in Norway. Emmett will check that and when it comes to the share erosion and also then pouches, which is not us pronounced as the overall share erosion we have seen since we suffer from the decline of the lose segment but it is reality it is a concern and it is something that we focus a lot on.

And we are doing a lot of good things and we have a high activity schedule for the remainder of the year and that we have just come out with a new upgraded product range on the lab fresh product. It’s a little bit too early to draw any conclusions from that. Because it takes a little bit of time for consumers nowadays to in Norway to discover products as well because following it was 1st of June or 1st July I don’t remember.

But now all the fridges in Norway have been moving behind the counter in Norway and it was about half of them that were out in stores before and they are not allowed to be out in stores anymore. So also a lot of work has gone into cooperating with the retailers on rebuilding out and putting new fridges behind the counter.

And then we have some other product initiatives and so forth the that we prefer to not to discuss with you guys about before we have presented them to the retailers and so forth. But we are doing in my opinion, we are doing a lot of good things on a Norwegian market we have a very strong and focused organization, but we have a good competitor there as well.

James Bushnell – Exane BNP Paribas

Okay thank you very much.

Operator

And the next question comes from the line of Kate Kalashnikova from Berenberg. Please ask your question.

Kate Kalashnikova – Joh. Berenberg, Gossler & Co.

Hello, my question is on lights. What was the main drivers of the weaker lights performance this quarter. And what is generally your expectation of the performance of the lights product area going forward for the full year?

Lars Dahlgren

When it comes to the lights performance first of all we have had a long period of very, very good development I would say particular for our lighter business. And that business is still very strong. We did have volume declines however in the lighter business this quarter and quite a bit of that volume decline was lower price of the lighters therefore you don’t see the dramatic effect on the gross margin and we actually grow operating profits, since they’ve also been very effective in working with the supply chain.

So we have increased the productivity in the lighter business. And when we look forward for the second half of this year as part of the lighter business there are also advertising lighter that tends to be relatively large volumes in short-term period of time. And what typically happens is that you have sort of a handful of those contracts during a year. And now when we look into the order pipeline it looks relatively and beyond that side for the second half while it looks relatively good in the second half of last year. So we will not have that same amount of advertising lighters in the second half of this year.

In the Match business we it has been more challenging for sometime and particularly I would say the Brazilian markets, where we have suffered both from inherent volume decline in the market, but also the weakening of the Brazilian Real because that has affected the cost of goods sold, because some other raw materials are imported. So that has pressure on and then there was also a price increase in the second quarter in Brazil, which meant that the volumes are a bit unusually low on the Brazilian market in the second quarter.

Kate Kalashnikova – Joh. Berenberg, Gossler & Co.

Okay, that’s very helpful. And also what’s your expectation for STG for four months – for the full year. Are you expect to negative product mix in machine made cigars to continue for example into the second half of the year?

Lars Dahlgren

I think that’s the trend, we’re seeing – but at the same time we see that the second half should be substantially better than the first half.

Kate Kalashnikova – Joh. Berenberg, Gossler & Co.

Okay, substantially better. Great, okay, that’s helpful. Thank you.

Lars Dahlgren

Thank you.

Operator

And the next question comes from the line of Kevin Dreyer from GAMCO Investors. Please ask your question.

Kevin V. Dreyer – GAMCO Investors, Inc.

Hi, good afternoon. I’m curious to learn more about this e-cigarettes announcement in Russia. Is this something that you developed internally, are you going to be reporting it I mean enroll to be very small both will be reported in your light segment and why Russia has the first place to try it out?

Lars Dahlgren

It will reported in the light segment and it shouldn’t have any materially impact on the profitability in the light segment for this year, because it’s a relatively small test. Russia is – because we think that it is a market where in the Cricket brand name is very strong and this has been discussed as a potential opportunity to evaluate and learn more about together with our distribution partner. And we have concluded that it’s a good market to come back to test. The products…

Kevin V. Dreyer – GAMCO Investors, Inc.

Yes, if I could just stop you there. I mean you could be used anything for the brand name. So the effect there Cricket strong in Russia, I guess I’m still not understanding why did you choose that market of any market around the world to test your first e-cigarette brand, because you don’t see a pulling from this Snus sales or moist stuff sales in other areas?

Lars Dahlgren

No, I think it’s a fact that it’s a strong brand name and that we have a well functioning and distribution business and if there is a curiosity among Russian consumers on e-cigarettes are all good reasons to select Russia and then if you make a test market. One market has to be the first. And so it’s a there are not any other, so to say hidden strategic things behind the decision to go with Russia, lot has to do with working with good people and we have excellent distributor in the Russian market that expressed will to evaluate this together with us and we thought it was a good opportunity and idea to gain more hands on insight. And as regards to products it’s a third-party sourced product.

Kevin V. Dreyer – GAMCO Investors, Inc.

Okay, third-party. All right, thank you.

Lars Dahlgren

Thank you.

Operator

The next question comes from the line of Anders Hansson from Danske Bank. Please ask your question.

Anders Hansson – Danske Bank Group

Hi, I have two follow-up questions, just on the balance sheet with your net debt being down 1 billion year-over-year and 2.4 times gearing of the dividend payment. And if we look back few years, you still have the phrase of we are going to distribute all cash not needed in operations, but a few years ago we talked about being below three and then it was between 2.7 times and 3 times and then it was 2.5 times to 3 times. And now you are saying 2.4 time to three times. I am just wondering have changed how to interpret distribute cash not needed in operations or have you changed your view on gearing leverage or comfortable with or how should we look at this?

Lars Dahlgren

And well, I think we have been clear for quite sometime that around 2.4, 2.5 that is a level which we think is well reflective of our target ratio. And then the reason why, distributions or share buybacks have been relatively low is because that we haven’t seen the type of historic EBITDA development that we have at. Now in the second quarter there were no share buybacks and that has to do with the fact that we paid out our dividend, but nothing has changed to going forward in terms of our intention to distribute funds that with on the operations to our shareholders. So going forward its our ambition that share repurchases we still resume.

Anders Hansson – Danske Bank Group

Okay, one more thing on the STG, which you may have commented on but I have missed to say that H2 should be significantly better than the first half. How should the second half be in a year-over-year comparison should it still be better or clear the better or inlineish?

Lars Dahlgren

Yeah, I mean I think we will get back to that the – after the third quarter, but the important thing now as I see it is that we improve from where we are and because development in the first six months and particularly in the second quarter must have been a little bit disappointing. So but we see good indications that it should improve and exactly, where it will land we will have to get back to.

Anders Hansson – Danske Bank Group

Okay thank you.

Operator

(Operator Instructions) The next question comes from the line of James Bushnell from Exane. Please ask your question.

James Bushnell – Exane BNP Paribas

Hi, thanks for taking the follow-up. Just on U.S. Snus you say, focused on brand building I know – therefore talk too much about selling rates anymore. In terms of where you market share is though now around a 11%, where do you think you can get to by the year end without much increase in the store count just from your focus on getting those sales up through your existing network. And if you could give us any color on what you are targeting beyond that level also be interesting? Thank you.

Lars Dahlgren

Yeah, its difficult to forecast and but when you look at the market share I mean we look at Nielson data. Then we also look at data that we get from the distributors where we can compare only in stores where we compete with the other person in the category. And we have a very clear trend of gaining market share in the second source of data as well. So it’s not the fact that the Nielson data is exclusively attributable to higher available distribution this year compared to last year. So that is a clear underlying trend and its definitely our ambition that we should see continued share against throughout this year, but I am not in a position to give you a number there.

James Bushnell – Exane BNP Paribas

Okay, that’s right. Thank you.

Operator

There are no further questions at this time. Please continue.

Lars Dahlgren

Okay. And we thank you everybody and just to inform you that the release of the third quarter results will be on October 24.

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