Reynolds American Inc. Q1 2010 Earnings Call Transcript

Reynolds American Inc. Q1 2010 Earnings Call Transcript
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Reynolds American Inc. (RAI)

Q1 2010 Earnings Call

April 22, 2010 10:30 a.m. ET

Executives

Morris Moore - VP, IR

Susan Ivey - Chairman and CEO

Tom Adams - CFO

Analysts

Judy Hong - Goldman Sachs

David Adelman - Morgan Stanley

Thilo Wrede - Credit Suisse

Chris Growe - Stifel Nicolaus

Christine Farkas - Bank of America

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Reynolds American first quarter earnings conference call. (Operator Instructions)

I would now like to introduce your host for today's program, Mr. Morris Moore. Please go ahead, sir.

Morris Moore

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Good morning and thank you for joining us. Today we'll discuss Reynolds American's results for the first quarter. 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; and our CFO, Tom Adams.

Before I turn the call over to Susan, I need to cover the Safe Harbor provisions. During the call, we'll discuss forward-looking information. When we talk about future results or events, a number of factors could make results materially different from our projections. These factors are detailed in our press release and SEC filings. Except as provided by federal securities laws, we're not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

I'd also like to remind you that RAI's website is our primary source for publicly-disclosed news about our company, and we encourage investors and others to sign up for e-mail alerts, the news about the company has been posted.

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

Susan Ivey

Good morning, everyone. As our results showed today, the continued strength of our operating company strategy and brand delivered higher first quarter earnings and total cigarette market share compared with the prior-year quarter. This represents a good start to the year, especially considering that our company has achieved these results in a very challenging, competitive and economic environment.

The first quarter was marked by heightened competitive promotional activity and product introductions in both the cigarette and moist-snuff categories. And consumer spending patterns continue to be affected by higher tobacco taxes and the weak economy.

In addition, comparisons to last year's quarter were influenced by a number of factors. First, there was an unusually low cigarette and moist-snuff volume in the prior-year quarter. That was due to trade inventory reductions ahead of the unprecedented increases in federal tobacco excise taxes. In addition, during the past year, there have been significant shift in pricing and promotion strategy, especially in the moist-snuff category.

Even so, our company's focus on executing their strategy again delivered solid performance. Both of our reportable operating segments continued to impost important gains. R.J. Reynolds increased operating income and total cigarette market share. And American Snuff delivered double-digit moist-snuff volume growth and higher margins. I'm also pleased to report that our Santa Fe subsidiary posted double-digit volume and earnings growth in the quarter.

Before I provide more detail on our company's performance, I'd like to briefly comment on a few items. As we noted today, R.J. Reynolds and American Snuff are moving to a single field trade-marketing organization. R.J. Reynolds trade-marketing will be expanded to provide services to American Snuff.

Our companies have been evaluating this opportunity since last year, and we're excited by the many efficiencies and enhancements that this change offers. These include greater efficiency and speed to market, stronger support for the retail trade and enhanced retail presence for both companies' brands.

Both companies have worked hard to ensure smooth transition and to retain the extensive knowledge and skills of their current sales teams. To that end, we anticipate that nearly all of American Snuff field trade-marketing employees will be offered positions at R.J. Reynolds. This will enhance the new sales team's depth of expertise in both cigarette and moist-snuff categories. We expect the change to be essentially completed by the end of the third quarter.

Concerning the Canadian government settlement, as announced this month, R.J. Reynolds and its affiliate, Northern Brands International, have resolved civil claims and criminal charges related to cigarette smuggling in Canada in the 1980s and '90s. These settlements eliminate the uncertainties, expense and distraction that were associated with those claims.

On the regulatory front, RAI's operating companies continue to move forward in meeting their requirements under the new regulatory structure administered by the U.S. Food and Drug Administration. Our companies are well prepared to comply with the new federal regulations for successfully competing in this new environment.

Now let's take a closer look at the first quarter performance.

R.J. Reynolds' improvement in financial and marketplace results demonstrate the strength of the company's business strategy, product offerings and productivity initiative in a tough environment. R.J. Reynolds continues to benefit from its productivity initiative, including the reduction in its operation workforce that was announced in December. These initiatives keep the company's cost structure in line with its business needs.

R.J. Reynolds total cigarette market share also increased in the first quarter as Pall Mall continued to post strong share gains. I'd like to point out that even as the company has discontinued many of its non-core cigarette styles, gains in growth brands have kept the company's overall share performance stable for the past two years.

R.J. Reynolds again delivered volume and performance in line with the industry. And it's important to note that most of the company's first quarter volume decline came from its low margin private-label brands, which the company continues to deemphasize as it strengthens its brand portfolio. Adjusting for trade-inventory reductions in the prior-year quarter, R.J. Reynolds' first quarter decline was significantly lower than that of the industry.

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