Reynolds American (RAI) Q3 2011 Earnings Call October 25, 2011 9:00 am ET Executives Thomas R. Adams - Chief Financial Officer and Executive Vice President Morris Moore - Vice President of Investor Relations
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. Let me begin our discussions with several very positive developments. Earlier today, Reynolds American announced that its Board of Directors had approved a 5.7% increase in its dividend. Tom will provide more details in just a moment, but I'm very pleased with the Board's vote of confidence and continued support, not only for our near-term direction but also for our long-term strategy. We also like to report that for the fourth consecutive year, RAI has received independent recognition for its ongoing sustainability and responsibility initiatives. The company was again awarded membership in the Dow Jones Sustainability North America Index, and it's the only U.S. tobacco company in the index. And we are certainly proud of that recognition. So some very good news to start off our call today. Turning to RAI's outlook. Based on our results through the third quarter, we are tightening our earnings outlook for the full year. We now expect adjusted EPS of $2.63 to $2.68. I would note that our guidance excludes the impact of the individual Engle progeny cases and the Scott lawsuit, as well as implementation and integration costs and tax items, which Tom will discuss in more detail. Now, I'll give you my perspective on the company's results in the third quarter and year-to-date. Overall, I'm very pleased with RAI's solid third quarter performance. I believe our performance reflects both the fundamental strength and positive momentum of our business strategy. These results are particularly noteworthy because they come in the face of a challenging economic and competitive environment. Our third quarter results underscore our ability to manage near-term challenges while continuing to transform our business for the long term in an evolving industry.
So let's look at how our operating companies did in more detail. R.J. Reynolds performed very well this quarter despite a difficult operating environment. The company delivered higher adjusted operating income and excellent improvement in their adjusted operating margin in both the third quarter and the first 9 months of this year. Driving these results were gains on the company's 2 growth brands, Camel and Pall Mall, along with continued pricing and productivity improvements. Before I get into more detail on our performance, let's step back and look at industry cigarette volumes.Total cigarette industry shipment volume declined 6.4% in the third quarter, and R.J. Reynolds' volume, excluding the company's deemphasized private label brands, was in line with the industry. As many of you know, industry shipment volumes have fluctuated significantly across the quarters this year due to large swings in the wholesale inventory levels. When we look at the category on a year-to-date basis, we get a much better view of the actual underlying performance. For the first 9 months of this year, industry shipment volume declined 3.7%, while R.J. Reynolds' cigarette volume, excluding private label brands, was down 4.4%. R.J. Reynolds' volume decline was driven by losses on support and nonsupport brands. These brands have been hit hard by a significant increase in competitive promotional activity this year. As you know, R.J. Reynolds manages these brands to optimize the mix between market share performance and profitability. And in order to accomplish that, the company has not significantly increased the discounting levels on these brands this year. Now looking at market share. R.J. Reynolds' total cigarette market share, excluding private label, was down 0.8% for the quarter. But, again, for the 9 months, it was in line with the prior-year period at 27.4%. R.J. Reynolds' growth brand, Camel and Pall Mall, once again delivered good performance in the third quarter. These 2 brands continue to play an increasingly important role in R.J. Reynolds' results and now account for 60% of the company's total cigarette volume. Read the rest of this transcript for free on seekingalpha.com