February 7, 2010 - Reynolds American reported that its net income for the fourth quarter ended December 31, 2009 was $215 million, a 16.7% decrease, compared to $258 million for the fourth quarter ended December 31, 2008. For year net income was $962 million, a 28.1% decrease, compared with $1,338 billion in 2008.
Susan Ivey, Chairman of Board, President and CEO - Our earnings were down last year, On the economic front, we started the year in a deep recession, with high unemployment that depressed consumer spending and specific to the Tobacco industry, we saw unprecedented increases in federal tobacco excise taxes, which led to the retail price of a pack of cigarettes increasing by about 25%.
Reynolds American Inc.'s reported lower cigarette volumes but improved market share at its R.J. Reynolds and Conwood divisions.
Tobacco companies' cigarette shipments fell even faster in 2009 than in earlier years as vendors and consumers adjusted to tax increases including the federal hike of 62 cents per pack that took effect in April.
Volume at the R.J. Reynolds tobacco division slid 7.6%, and adjusted earnings fell 9.8%. Market share improved 0.2 percentage points to 28.5%, while Camel's market share slipped 0.4 points to 7.4%. At the Conwood unit, which makes smokeless-tobacco brands Kodiak and Grizzly, adjusted earnings fell 16%, but volume grew 5.7%. Market share for moist snuff shipments climbed 1.2 percentage points to 29.4%.
The economy is in a significant recession, unemployment levels are still rising and cigarette smokers experiencing a 25 percent increase in their daily expenditures
Cigarettes:
Predicted for 2010 the industry decline this year will be between 4% and 5% compare to 8% and 9% in 2009.
The company’s total cigarette share has been relatively stable for the past two years, at just over 28%. Camels’ flagship brand continued evolution into a total tobacco brand and Pall Mall becoming the fourth largest cigarette brand in the nation.
R.J. Reynolds’ total cigarette volume declined 8.7% last year, compared with the industry decline of 8.6%. With respect to cigarette market share, R.J. Reynolds’ full year share was essentially flat at 28.3%, as overall growth brand gains largely offset declines in support and non-support brands.
Growth brands, Camel and Pall Mall, delivered a combined full year cigarette share of 12.3%, up 1.9 share points from the prior year. This improved performance was driven by strong growth in Pall Mall. Camel cigarette market share for the full year was 7.5%, down one-tenth of a share point. However, Camel’s total tobacco market share grew to 7.8%, as cigarette equivalent share of 0.3% from Camel Snus more than offset the slight decline in Camel cigarettes. Turning to Pall Mall, Pall Mall grew 2.1 share points to 4.8% in 2009, as the brand continued to retain roughly half of the volume it gained from its promotions. So those are the R.J. Reynolds key results.
Camel’s focus on strengthening its core cigarette business is a key part of the company’s strategy to grow Camel as a total tobacco brand. The strategy includes broadening the brand, to offer innovative modern smoke-free products like Camel Snus and Dissolvables as well as Conwood’s Camel Dip.
Camel’s first smoke-free innovation, Camel Snus was launched nationally early last year and it’s already contributing to Camel’s total tobacco share.
It gets harder and harder to determine, what is a value brand? What is a premium brand? The segments are blurring. There is an awful lot of promotional activity in many of the premium brands and then of course there is the value brand segment, an everyday value like Pall Mall and then there’s the non-big three. So, I think that we have to see what happens as the economy improves, do consumers trade back up or do taxes and prices keep them searching for honest value.
Growth brands now represent almost half of the company's total cigarette market share.
Camel continued its focus on building the brand’s core cigarette styles, discontinuing five additional non-core styles, without adding any new line extensions last year.
Pall Mall sells for an affordable price, but it differentiates itself by offering a high quality, longer lasting cigarette. Pall Mall, we get about a 50% conversion to the brand, and the brand is becoming increasingly popular.
Camel Crush gives adult smokers the unique choice of regular or menthol with each cigarette. R.J. Reynolds focus on Camel in the menthol category increased the brand’s total menthol share, in this growing segment in 2009, and the company expects further growth from the recent expansion of its innovative capsule technology to Camel’s two core menthol styles and next month the company will add exciting new packaging to further raise awareness and competitive trial on these menthol styles.
Moist snuff
Conwood’s total shipment volume grew 6.4% for the year, well ahead of the industry’s growth of 4.4%. Grizzly’s full year volume increased 8.9% despite significant pricing pressure from both premium and value brands and the brand also posted a strong share gain of two share points, bringing Grizzly’s share to 25.3% for the full year. Conwood’s total share was up 1.8 share points at 29.4%. So that’s a quick look at the considerable progress that R.J. Reynolds and Conwood made in 2009.
At Conwood, the company announced that its name would change to American Snuff Company at the beginning of this year.
Conwood is focused on adding even more value and equity to the Grizzly brand, with embossed metal lids being introduced this month. The brand is also introducing Grizzly 1900 Long Cut, a natural product with a traditional cut that will broaden Grizzly’s appeal amongst moist-snuff consumers.
Conwood’s largest competitor significantly reduced the price of its premium products. Conwood’s competitors also heightened promotional spending on their premium and value price products. Even so, Conwood delivered impressive results, with Grizzly driving strong gains in moist-snuff volume and share. The company now commands almost 30% of the moist-snuff market.
While Conwood’s adjusted operating income was down for the year, this decline was primarily driven by lower margins on the company’s premium Kodiak brand. Conwood reduced the brand’s price in the second quarter to bring it inline with competitive premium brands. It’s also important to note that Conwood increased its adjusted operating margin for the year, as it benefited from higher volume and a price increase on Grizzly, as well as higher pricing on its other products.
Conwood’s fourth quarter operating income was $83 million, down 16%. Grizzly’s volume and pricing gains were more than offset by lower margins on Kodiak, as well as support for the introduction of Grizzly Snuff Pouches, and increased promotional spending in several states.
Susan Ivey: I think the results in ‘09 clearly demonstrate the strength of Grizzly. There was a lot of promotional activity in the moist-snuff segment in the fourth quarter, certainly one of those was Copenhagen Long Cut Wintergreen and we also saw a lot of promotion at the bottom end of the market as well. Grizzly I think performed very, very well. Our current view is that Grizzly is currently donating much less than half of its fair share to trial of Copenhagen Long Cut Wintergreen, but it’s very early days. I believe Grizzly’s product is superior. I believe its equity is exceptionally strong and I think it demonstrated that last year.
Kodiak - premium moist snuff - reducing Kodiak’s price last year (2009) has helped to improve the brand’s performance and stabilize its share and Kodiak is now upgrading its image with new packaging that also features metal lids.
Camel Dip, Conwood’s latest premium introduction, features product and packaging innovations. The brand is generated very encouraging consumer response since its mid year introduction into two week markets. Camel Dip is being expanded to 10 additional states this month, along with the launch of the brand’s third style, Camel Wintergreen pouches.
Camel Snus - Camel’s first smoke-free innovation, Camel Snus was launched nationally early last year and it’s already contributing to Camel’s total tobacco share. Camel Snus significantly outsells competitive products in the markets where they compete. However, because this is a new category in the U.S., consumer education is a key to building awareness and trial, and this takes time.
Camel Dissolvables — Orbs, Sticks and Strips — are currently in three lead markets, and the
company is gaining valuable consumer insights on ways to improve these products and their
packaging.
Niconovum AB - In December 2009 RAI completed the acquisition of Niconovum AB, a Swedish-based nicotine replacement therapy (NRT) company, purchasing all outstanding shares of the company for 310 million Swedish kronor,or approximately $44 million. Niconovum AB markets innovative nicotine replacement therapy (NRT) products in Sweden and Denmark under the Zonnic brand name. Nicotine-Replacement therapy products are a small category with good potential for future growth. These products also align with public health objectives. Like RAI’s other companies, Niconovum strength is in its superior technology and innovative products that will offer more you appeal to consumers than existing products.
Reference: Reynolds American Inc. Q4 2009 Earnings Call Transcript, SeekingAlpha.com, 2/4/2010.
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