Reynolds American Inc. (

RAI

)

Q3 2010 Earnings Call

October 21, 2010 10:30 am ET

Executives

Morris Moore - IR

Susan Ivey - Chairman, President and CEO

Tom Adams - EVP and CFO

Dan Delen - Chairman, President and CEO, R.J. Reynolds Tobacco Company

Analysts

Nik Modi - UBS

David Adelman - Morgan Stanley

Ann Gurkin – Davenport

Karen Lemark - Federated Investors

Christine Farkas - Bank of America Merrill Lynch

Presentation

Operator

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Previous Statements by RAI
» Reynolds American, Inc. Q2 2010 Earnings Call Transcript
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» Reynolds American Inc. Q3 2009 Earnings Call Transcript

Good day, ladies and gentlemen and welcome to the Reynolds American third quarter earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Morris Moore, Head of Investor Relations. Please go ahead.

Morris Moore

Good morning and thank you for joining us. Today we'll discuss Reynolds American's results for the third quarter and nine months. We'll discuss our results on both the reported and adjusted basis. A reconciliation of reported to adjusted earnings is in our press release, which is on our website at reynoldsamerican.com.

Joining me this morning are RAI's, Chairman and CEO, Susan Ivey; our CFO, Tom Adams; and Dan Delen, R.J. Reynolds, Chairman and CEO.

We advise that the information we are about to discuss includes forward-looking statements. When we talk about future results or events, a number of factors could generate results materially different from our projections today. These factors include, but are not limited to items detailed in our press release and SEC filings. Except as provided by Federal Securities laws, we are not required to publicly update or revise any forward-looking statements.

Additionally, reynoldsamerican.com is a primary source for publicly disclosed information about our company. And we encourage investors and others to sign up to receive email alerts, whenever news about the company has been posted.

And now, I'll turn the call over to Susan.

Susan Ivey

Good morning, I am very pleased with RAI's strong third quarter results, which reflect the positive momentum of our business. As we reported today, increases in adjusted earnings and margins were driven by gains in our operating company's powerful key brands, all of which posted record consumer uptake market share in the third quarter.

It is clear that both of our reportable business segments continue to effectively execute their strategies in a changing tobacco environment, and we remain on track for a strong year.

I'd like to remind you of several significant recent developments at RAI. As we announced on October 15, RAI Board of Directors approved an increase of 8.9% in our dividend, reflecting RAI's strong financial performance and it is further evident of our deep commitment to returning value to our shareholders.

The Board also approved a two-for-one stock split that will be effective on November 15. We also announced last week that I plan to retire on February 28th. I've had a long and rewarding career in the tobacco industry, with the last ten years in the CEO role.

Dan Delen who has led R.J. Reynolds Tobacco for the past four years will succeed me as CEO. Dan and I have worked closely to develop the successful strategies that have helped to transform RAI's business model. With Dan's depth of knowledge and experience in the global tobacco industry and with Brown & Williamson and R.J. Reynolds' domestically, I believe that he is extremely well prepared to assume his new leadership role. Dan and I look forward to seeing all of you next month at our Investor Day presentation.

The expansion of R.J. Reynolds' field trade-marketing organization to serve American Snuff, through a services agreement has been largely completed. This change gives both companies greater speed to market, provides stronger support for the retail trade, and gives the company's brand a strong retail presence, and will significantly benefit American Snuff brand. The transition has been a very smooth one and we expect this strategic move to offer both operating companies substantial benefit and efficiencies.

Also, the move to consolidate cigarette manufacturing and expand moist-snuff production capacity, are progressing well. The Puerto Rico cigarette factory was closed this summer and the Whitaker Park factory is on schedule to close by the middle of next year. Production is being consolidated at R.J. Reynolds' Tobaccoville manufacturing facility. The construction of American Snuff facilities to increase their smokeless-tobacco processing and manufacturing capacity is well underway.

On the regulatory front, RAI's operating companies continue to be in compliance with the emerging requirements of the US Food and Drug Administration and our operating companies are demonstrating that they can effectively compete in this new regulatory environment.

Now turning to RAI's outlook, based on our results through the third quarter, the company has reaffirmed and tightened its earnings outlook for the full-year. And we now expect adjusted EPS of $4.95 to $5.05.

I would note that, our guidance excludes charges related to cigarette plant closings, the expansion of R.J. Reynolds' field trade-marketing organization, changes in federal health-care laws and the Canadian governments' settlements.

And now I’d like to recap several highlights in the third quarter. R.J. Reynolds again delivered adjusted operating income and margin at higher levels. This was supported by gains in both volume and share on the company's two growth brands, Camel and Pall Mall, with continued pricing and promotional efficiencies and productivity improvement.

American Snuff also posted record adjusted operating income and margin, while delivering higher moist-snuff volume. With respect to RAI's Santa Fe subsidiary, Santa Fe continue to deliver excellent results in the third quarter, as its Natural American Spirit brand again drove gains in earnings and volume and posted record market share.

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