July 25, 2009 - Reynolds American Inc.'s ability to raise its cigarette prices in response to a higher federal excise tax enabled it to post a 4 percent increase in net income in the second quarter despite lower sales. In response to the 62-cent increase in the federal excise tax, effective April 1, Reynolds raised in March the list price on its cigarette brands from 41 cents to 78 cents a pack for wholesale customers.
Susan Ivey, Chairman, President and CEO of Reynolds American, Inc..
"For the second quarter and the first half of 2009, higher pricing, lower promotional expense and additional productivity gains, including those from last year's restructuring at R.J. Reynolds, more than offset the impact of lower cigarette volume, higher pension and legal expense, and Master Settlement Agreement costs," the company said in a statement.
The company said it had a slight market-share gain in cigarettes, led by its Pall Mall brand, and a larger gain in moist-snuff tobacco, led by industry leader Grizzly.
While the market share for Camel, the lead Reynolds cigarette brand, remained at 7.5 percent, the market share of the value growth brand Pall Mall (may be the result of 2-pulse promotions, i.e., lower the price for a short period and the raise it) doubled to 5.2 percent compared with a year ago, according to data from Information Resources Inc./Capstone, a research group.
Overall, Reynolds' cigarette brands had a 28.7 percent market share, up 0.3 percentage points.
Camel Snus was expanded nationally in the first quarter. In the second quarter, it achieved the equivalent cigarette market share of 0.3 percentage Reynolds accounted a tin of snus equaling a pack of cigarettes since they are similarly priced. Ivey - Camel Snus has growing appeal and we expect it to build momentum over time. Question: Do you have a sense of where that is coming from, either traditional cigarettes or moist snuff, and do you have any sense from that perspective? Ivey: Yes, our research shows that it is primarily smokers and it is smokers who are using Snus when they can't smoke and I am – there is the occasional dipper who uses it when they don't want to spit, but really it is coming from smokers, and it is coming across the board in terms of source of brands. So Camel is slightly over index but not a lot.
In the increasingly competitive moist-snuff category, Grizzly (the nations number one moist snuff brand) expanded its market share to 25.5 percent, up 2.2 percentage points, according to data from Management Science Associates Inc., a research group. Conwood's overall market share was up 1.9 percent to 29.4 percent. Question: with FET result steep increase in cigarette price relative to more modest increase in smokeless. Ivey: don't have that detail; Grizzly of course has just continued on its growth path as it continues to capture a large share of people either coming into the category from cigarettes or trading as prices increase. Grizzly pouches (2-pouch styles, mint and straight), launched in the 1st quarter 2009 only accounted for 0.2 of a share point.
This year there have been significant reductions in the retail price of premium moist snuff product (Altria reducing the price of UST's Skoal and Copenhagen). This has further narrowed the price gap between premium and Grizzly's. In addition, Grizzly announced a price increase in June. The national average price gap at retail now stands at about a $1.35 a can. That gap has been cut in half since RAI brought Conwood in 2006. Even so, Grizzly's market share has grown by more than six percentage points in the past three years.
The cigarette shipment volume for the R.J. Reynolds Tobacco Co. subsidiary fell 6 percent in the second quarter compared with an industry decline of 4.1 percent.
Camel Crush (market share 0.6 of a point with relatively low promotion levels) - Camel, R.J. Reynolds premium growth brand, continued to benefit from recent innovation. Camel Crush, which went national late last year, is enhancing Camel's position in the growing menthol category. Beginning in August, that capsule technology will be expanded to Camel's core menthol styles, but instead of changing the cigarettes from regular to menthol, the capsule will offer adult smokers of these menthol styles the option of adding more menthol to suit their taste.
Camel Dissolvables - Camel Orbs went into three lead markets in the first quarter and R.J. Reynolds will add Camel Sticks and Camel Strips to these markets this summer. Adult female smokers find Camel Orbs much more appealing than other smokeless tobacco products. And women make up about half of all smokers, so that greatly expands the opportunity for Camel Dissolvable products. Question: with respect to FDA, now that it is past, is there a real threat that they will force products that were recently launched like the Orbs, Dips, and Strips to be considered new products under that legislation? And so with that possibility that those products have to be pulled from the market or is that risk relatively modest at this point? Ivey: Our position is very clear. These products are very similar to other moist type of style of products (Star Scientific's Ariva and Stonewall HardSnuff Dissolvable Tobacco.) and so we will continue to evaluate these Dissolvables in the lead market.
Reynolds American Inc. Q2 2009 Earnings Call Transcript
Reference: Reynolds American Second-Quarter Profit Climbs, Boosts Outlook by Richard Carver, Winston-Salem Journal, 7/23/2009.