Reynolds American's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Reynolds American (RAI)

Q1 2012 Earnings Call

April 24, 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

Unknown Analyst

Vivien Azer - Citigroup Inc, Research Division

Christina McGlone - Deutsche Bank AG, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

David J. Adelman - Morgan Stanley, Research Division

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

Priya Ohri-Gupta - Barclays Capital, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

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

Thilo Wrede - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Reynolds American First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And now I'll turn the conference over to your host, Vice President of Investor Relations, Mr. Morris Moore. Please begin.

Morris Moore

Good morning, and thank you for joining us. Today, we'll discuss Reynolds American's results for the first quarter, as well as our outlook for the full year. As always, our discussion will focus on adjusted results as 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're 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. Clearly, the year have gone off to a tough start. But when you look below the surface, we actually did quite well in navigating the challenges. Let me provide some additional insight into why we believe that our company has demonstrated considerable strength and resilience in their underlying performance.

As you probably know, the promotional environment was very aggressive in the first quarter. To be clear, promotion on value-priced line extensions on competitive premium brands intensified significantly. While competitors increase their focus on the value category, R.J. Reynolds maintained its focus on balancing market share and profitability. And while volumes were negatively impacted, the company saw improvement in both its premium mix and operating margin.

American Snuff continued to deliver outstanding growth on Grizzly, but the earnings comparison was negatively impacted by the company's investment in the new retail moist-snuff contracts. And that investment is delivering great results.

The sale of Lane last year also hurt the comparison. In fact, excluding that change, the company's earnings would have been up. And Santa Fe generated excellent growth in market share, although its volumes and earnings were impacted in the quarter by the company's decision to move to a more efficient and integrated supply chain. So while this change is clearly positive for the business, its offtakes on the quarter's results appear negative. So that's the snapshot of some of the key items that drove our first quarter results.

As you're aware, we also continue to focus on productivity, and we've completed a comprehensive review of the key programs and activities at RAI, RAI Services and most departments within R.J. Reynolds Tobacco. This process has generated considerable cost savings and provides us flexibility to adjust to changing market conditions. This also allows our company to continue to develop product innovation and further strengthen their key brands.

Despite the challenging quarter, I'm confident that our operating company's business strategies will continue to move us forward this year. Our company has continued to demonstrate their ability to adapt to changing circumstances, while maintaining their focus on balancing market share and profitability.

And our company's prospects are greatly strengthened by an effective brand portfolio strategy that offers adult tobacco consumers a broad range of distinct tobacco products at different price points. This diversification strategy offers a competitive advantage as we move ahead. And we'll pay dividends over the long-term, as we remain committed to leading the transformation of the tobacco industry.

As such, I'm pleased to be able to reaffirm our full-year earnings guidance. We remain on course to deliver adjusted EPS growth in the mid- to high-single digits for 2012.

Before I review our operating company's performance, I'd note that the FDA continues to be active in issuing several reports and guidance documents, and we're complying with the agency's requirements. I'd like to take a moment to comment on one report, the dissolvable tobacco products report, issued by the Tobacco Products Scientific Advisory Committee, which concluded that exclusive use of dissolvable tobacco products would greatly reduce health risks compared with regular use of cigarettes. However, the committee also noted that to date, experience is limited and observational evidence is lacking on how dissolvable tobacco products might affect the use of other tobacco products.

At RAI and its operating companies, one of our guiding principles and beliefs and a part of our strategy to transform tobacco is that adult tobacco consumers have a right to be fully and accurately informed about the risks and the significant difference in the competitive risks of different tobacco and nicotine-based products. This information should be based on sound science, and the TPSAC report underscores the importance and relevance of this principle.

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