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
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. Read the rest of this transcript for free on seekingalpha.com