Reynolds American Inc. - q3 2009 earnings results..

October 22, 2009 - Reynolds American Inc. (RAI) posted better-than-expected profits and raised their year outlooks, as pricing remained strong but volumes lagged. Reynolds American Inc saw cigarette sales volume decline more than expected in the third quarter, as a tough economy and tax hikes prompted some smokers to switch to lower-priced brands.

Susan M. Ivey, RAI’s chairman, president and CEO: “This year has been marked by unprecedented increases in excise taxes on tobacco products, an extremely weak economy and intense competitive activity,” said “But the strength of our strategies and our operating companies’ brands has allowed us to continue to perform well even in these difficult times.” Ivey attributed Reynolds' third-quarter performance to improved operating margins, market share gains in some brands, and improved volume and market share for its moist snuff tobacco.

Cigarette volume fell 11 percent at Reynolds, nearly double the 5.6 percent decline anticipated by Credit Suisse analyst Thilo Wrede. The company estimated that its 11 percent drop in volume was better than the industry's overall decline, which it pegged at 12.6 percent. Camel lost 0.1 percentage point of market share in the U.S. and ended the quarter with 7.7 percent, according to data from Information Resources Inc. Pall Mall, which the company is aggressively promoting as a longer-lasting, more affordable cigarette, gained 2.3 points to end up with 5.0 percent of the U.S. market. The combined market share of Camel and Pal Mall is now at 12.7 percent - these brands have now grown to 45 percent of R.J. Reynolds’ total cigarette share.

In a conference call with investors, Ms. Ivey said she expects US cigarette demand to fall 8 percent to 9 percent per year and easing back to annual drops of 3 percent to 4 percent over the next few years.

R.J. Reynolds’ cigarette volume declined 9.1 percent, which was much more in line with the industry average of 8.9 percent. Reynolds' total third-quarter cigarette market share was 28.2 percent, down 0.2 percentage points from the prior-year period, with growth-brand gains partially offsetting declines in the company’s support and non-support brands. (Total cigarette market share has remained relatively stable since the beginning of 2008.)

Net sales fell about 5 percent to $2.15 billion.

More cigarettes: Camel, the company’s leading premium brand, continued to show strength, with a third quarter total-tobacco market share of 8.0 percent, up 0.2 percentage points from the prior year period, as performance from Camel Snus more than offset a modest cigarette decline of 0.1 percentage points. As stated, Camel’s third-quarter cigarette share was 7.7 percent.

Camel Crush, continues to perform well, with market share of 0.7 percent in the third quarter. Camel Crush uses R.J. Reynolds’ capsule technology to offer smokers the choice of regular or menthol with each cigarette. In August, the company expanded the use of this technology to Camel’s two core menthol styles to enhance the brand’s performance in the growing menthol category. These styles now offer adult smokers the option of adding more menthol flavor to each cigarette at any time.

Market share performance for the quarter? Susan Ivey: Camel was 1.43 share points in its menthol performance.

Pall Mall, R.J. Reynolds’ other growth brand, continues to perform very well. The brand’s high quality, great price and the fact that it lasts longer than other cigarettes, offers exceptional value to consumers. That makes Pall Mall especially appealing in the current economic environment. The brand’s third-quarter market share rose 2.3 percentage points from the prior-year period, to 5.0 percent.
Pall Mall began another pulse promotion (scheme of reducing price for a while and then after some smokers have switched raise the price) in October, and the company expects this to generate higher levels of trial and conversion. Pall Mall retains about half of its share gains from promotions, and the brand has added more
than 2 share points since its second-quarter promotion.

Pall Mall is now the leading value brand in the country. R. J. Reynolds’ support brands are showing continued stability with moderating share declines in keeping with the role they play in the brand portfolio strategy. The majority of the support brands declines came from two brands, Kool and Doral.

Conwood - Moist snuff: Bryan K. Stockdale, Conwood’s president and chief executive
officer: "Conwood’s third-quarter performance was highlighted by continued strong gains in moist snuff volume and share. Conwood’s total moist-snuff market share is now just under 30 percent, with Grizzly continuing to deliver exceptional growth.”

Grizzly continued to enhance its position as the moist-snuff category leader despite
substantial premium-brand price reductions and significant competitive promotions. Grizzly’s third-quarter share of 25.6 percent was up 2.1 percentage points from the prior-year period. Grizzly pricing and volume gains partially offsetting lower margins on premium Kodiak, as well as volume declines in roll-your-own and little cigars. The company reduced Kodiak’s price in the second quarter to make it competitive with other premium brands. Kodiak brand had a third-quarter share of 3.9 percent, down 0.2 percentage points from the prior-year period. However, Kodiak’s share has increased by 0.2 percentage points since the brand’s April price reduction.

Stockdale: “Grizzly now accounts for more than half of the moist-snuff value (discount) segment, and it has captured about 85 percent of total category growth this year,” he said. “Grizzly has also enhanced its profitability with a June price increase of 10 cents a can.”

“Conwood’s latest premium introduction, Camel Dip, has delivered very encouraging
consumer response in its two lead markets,” Stockdale said. “Consumers like the innovative packaging and unique products, and we’re encouraged by what we’ve seen and learned to this point.” Conwood is confident that over time these product and packaging points of difference, supported by the heritage of the Camel brand, will help the company improve its position in the premium moist-snuff segment.

R.J. Reynolds Camel SNUS and Dissolvables.. Camel Snus, which was expanded nationally in the first quarter of this year, continues to gain
awareness and trial. Its third-quarter market share was 0.3 percentage points on a cigarette equivalent basis, which assumes that a tin of Camel Snus is equal to a pack of cigarettes. Camel Dissolvables — Orbs, Sticks and Strips — are currently in three lead markets. These products are made of finely-milled tobacco and completely dissolve in the mouth, offering consumers the most discreet and convenient way to enjoy tobacco today. “We’re excited about the potential of these new products, and we’re gaining valuable consumer insights about Dissolvables in their three lead markets.

Camel Snus went national earlier this year and have a share of three/tenths of 1% in the third quarter. That's on the cigarette equivalent basis that assumes a tin of Snus equals a pack of cigarettes.

Santa Fe Natural Tobacco: Susan Ivey delivered double-digit volume and earnings growth in the third quarter. (Santa Fe Natural Tobacco Company, Inc. manufactures Natural American Spirit additive-free tobacco product.)

Reynolds American, Inc.Q3 2009 Earnings Call Transcript.