Reynolds American's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Reynolds American (RAI)

Q4 2011 Earnings Call

February 08, 2012 9:00 am ET

Executives

Morris Moore -

Daniel M. Delen - Chief Executive Officer, President and Director

Thomas R. Adams - Chief Financial Officer and Executive Vice President

Analysts

Vivien Azer - Citigroup Inc, Research Division

Christina McGlone - Deutsche Bank AG, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Nik Modi - UBS Investment Bank, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

David J. Adelman - Morgan Stanley, Research Division

Michael Lavery - Credit Agricole Securities (USA) Inc., Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Unknown Analyst

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Reynolds American Fourth Quarter Earnings Conference Call. [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, Vice President 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 fourth quarter and full year, as well as our outlook for 2012. As usual, our discussions will focus on adjusted results as the management believes this better reflects our underlying business performance. 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 President and CEO, Dan Delen; and Tom Adams, our CFO.

The information we're 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.

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

Daniel M. Delen

Good morning, everyone. As we reported today, Reynolds American rounded out a challenging but successful year on many fronts, with significant growth in earnings and margins in the fourth quarter. And I'm pleased to say that this solid performance allowed us to continue to return substantial value to our shareholders. I remind you that in October, we announced another increase in our dividend, and that brought the total dividend increase for the year to 14.3%.

And in November, we announced the start of a $2.5 billion share repurchase program that will extend through mid-2014. These actions demonstrate not only our commitment to returning value to our shareholders, it also reflects our confidence in the business moving forward.

It's fair to say that over the past year, the market price environment has been a difficult one. And the year ahead is not likely to be an easy year. The weak economy and high unemployment rate continue to put pressure on consumer disposable income and competitive promotional activity remains intense. We don't expect these pressures to ease anytime soon, but are confident in our continued ability to deliver superior results.

This year, our operating companies intend to sustain the momentum on their key brands, and we'll continue to invest in innovation, while maintaining the financial flexibility to take advantage of competitive opportunities.

So with this in mind, we started a detailed review of all our key activities and resources to ensure that they're in line with today's business landscape.

As you saw on our earnings release this morning, RAI, RAI Services and most departments within R.J. Reynolds have started a comprehensive analysis of their program, activities and organizational structures. This review is just getting under way, and is expected to be completed by the end of the first quarter. As such, we're not in a position today to give specific details of this review.

RAI's operating companies had a strong track record of successfully managing through challenges, while also continuing to invest in and build their businesses for sustainable growth. Based on this track record, we expect good growth in earnings in 2012.

RAI's full year EPS is expected to increase by mid- to high-single digits over 2011 adjusted earnings. Tom will give you details on this in his financial update.

Now let's look at last year's performance at our operating companies. R.J. Reynolds delivered higher adjusted operating income and operating margin in both the fourth quarter and for the full year. Growth brand volume gains, higher pricing and productivity improvements more than offset the impact of cigarette volume decline.

As I explained earlier, R.J. Reynolds is operating in a tough environment and the company's cigarette volume was negatively impacted in the fourth quarter by heavily promoted competitive line extension, as well as the timing of the company's promotional activities. The company remains focused on balancing share, volume and profitability over the long term.

R.J. Reynolds volume performance was also affected by a strategic decision to move away from its private label brands. Excluding those brands, the company's fourth quarter volume decreased by 7.1% versus the industry decline of 2.7%. I would note here that nearly half of the volume decline came from the Doral value brand, for which the company derived only modest levels of pricing support.

Looking at the underlying volume performance over the full year, R.J. Reynolds' volume, excluding private label brands, was down 5.1% compared with an overall industry decline of 3.5%.

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