Reynolds American, Inc. (RAI)

Q2 2010 Earnings Conference Call

July 23, 2010 10:30 am ET


Morris Moore - VP, IR

Susan Ivey - Chairman, President & CEO

Tom Adams - EVP & CFO


Chris Growe - Stifel Nicolaus

Thilo Wrede - Credit Suisse

Judy Hong - Goldman Sachs

David Adelman - Morgan Stanley

Adam Spielman - Citigroup Investment Research

Christine Farkas - Bank of America/Merrill Lynch

Ann Gurkin - Davenport & Company

Karen Lamark - Federated Investors



Good day, ladies and gentlemen, and welcome to the Reynolds American second quarter earnings conference call. (Operator Instructions). I would now like to introduce your host for today's conference, 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 second quarter and first half, as well as our revised outlook for the full year. We’ll discuss our results on both the reported and adjusted basis. A reconciliation reported to adjusted earnings is in our press release, which is on our website at 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, when news about the company has been posted.


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

Susan Ivey

Good morning everyone. As we reported today, RAI delivered strong second quarter performance. I’m very pleased with these results, especially in light of last year’s unusually strong second quarter. Our operating companies key brand performance, productivity gains and promotional efficiencies drove RAI’s adjusted earnings and margin higher, demonstrating our continued momentum in delivering sustainable business growth. The strength of the second quarter results is especially impressive given the distortions in trade inventory levels in the prior year period.

In last year’s second quarter, wholesalers and retailers rebuild inventories on cigarettes and moist-snuff after they significantly reduced first quarter inventory ahead of the federal tobacco excise-tax increases. Even so, both of our reportable business segments continued to benefit from the underlying strength of their business strategies and key brands.

Based on this performance, we have increased our earnings guidance for the full year. RAI now expects 2010 adjusted EPS of $4.90 per share to $5.05 and increase from our previous guidance of $4.80 to $5 per share. This excludes second quarter charges related to the amounts closing of two cigarette factories and the expansion of R.J. Reynolds field trade-marketing organization to serve American Snuff to their services agreement, as well as first quarter charges related to changes in federal healthcare laws and Canadian government settlements.

Among the highlights of the second quarter, R.J. Reynolds posted higher adjusted operating income and a significant increase in adjusted operating margin, as well as further improvement in both of its growth brand, Camel and Pall Mall. And the American Snuff Company again increased moist-snuff volume led by growth on its powerful Grizzly brand. In addition, RAI’s Santa Fe subsidiary delivered excellent performance with second quarter gains in earnings, volume and share.

Before I provide more detail on our business performance, I would like to give you an update on a few additional items. The expansion of R.J. Reynolds field trade-marketing organization is going smoothly and exchange should be essentially completed by the end of the third quarter. As RAI announced in April, this strategic move offers us many efficiencies and enhancements, both internally and in our operating companies' ability to serve the retail trade.

As we reported in May, RAI operating companies are also taking steps to improve cigarette manufacturing efficiency and expand moist-snuff production capacity. Two cigarette factories will be closed over the next year and American Snuff is expanding its smokeless tobacco, processing and manufacturing capacity.

On the regulatory front, I’m pleased to report that RAI’s operating companies have fully met all requirements to date under the new regulatory structure administered by the US Food and Drug Administration. We now have structures in place across our operating companies to ensure comprehensive FDA compliance while effectively competing in this new environment.

And on the legal front, as you are aware in late June, the US Supreme Court denied both the government and the tobacco companies' request to hear appeal on the Department of Justice Law Suite. While R.J. Reynolds was disappointed that its application was denied, the denial of the government's application was a positive development as it eliminated the risk of financial damages in this case.

With respect to the Engle progeny cases, R.J. Reynolds has had a number of losses in these cases thus far. Although we are disappointed with the losses, we are not surprised of the outcomes and the finest attorneys are bringing their best cases to trial first. The company is in the process of appealing these cases and we fully expect to ultimately prevail.

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