April 23, 2010 -
Based in Winston-Salem, N.C., the Reynolds American Inc. said it sold 18.2 billion cigarettes in the period, 2.5 percent fewer than a year earlier, when retailers and wholesalers cut their orders ahead of a one-time federal tax on inventory. Adjusting for those cuts, cigarette volume declined 4.8 percent. The company estimates that cigarette volume fell 7.3 percent industry wide. Reynolds’ cigarette market share grew by 0.2 of a percentage point to 27.9 per cent, with Camel’s share down by 0.5 of a percentage point to 7.1 per cent and Pall Mall’s share up by 3.6 percentage points to 6.5 per cent.
Susan Ivey, the chairwoman, president and chief executive of Reynolds American, said she was pleased with the overall profit growth given "significant competitive promotional activity and product introductions in both the cigarette and moist-snuff categories."
As Altria has done with UST and John Middleton Co. - Ivey said that the company has started consolidating the trade-marketing groups of its R.J. Reynolds Tobacco and American Snuff Co. subsidiaries into Reynolds Tobacco. Reynolds' unit has about 1,800 jobs, while American Snuff has about 350 — the job positions are spread throughout the country. The company said that "nearly all employees" with the American Snuff unit will be offered positions at R.J. Reynolds. Ivey: you're absolutely right in your observation, it is not cost-driven. It is driven by the opportunity to enhance the speed to market, to enhance our service to the retail trade.
Sales of growth brands (i.e. Camel and Pall Mall) grew 32.9 percent to 9.1 billion, with Camel filter styles down 5.3 per cent to 4.7 billion but Pall Mall up 134.3 per cent to 4.4 billion. Sales of support brands fell by 21.0 percent to 7.7 billion while sales of non-support brands fell by 33.1 percent to 1.4 billion. Premium brand sales were down by 11.8 percent to 10.3 billion but sales of value brands were up by 13.2 per cent to 7.9 billion.
Reynolds estimated that total US industry sales fell by 2.4 percent to 72.0 billion, with sales of premium cigarettes down 1.5 per cent to 51 billion and sales of value brands down 4.6 per cent to 21.1 billion.
Ivey: Now turning to Pall Mall. Pall Mall continued to steadily build volume and share in the first quarter as consumers increasingly discover Pall Mall value as a high-quality, longer-lasting cigarette at an affordable price. The company has been aggressively promoting Pall Mall as a longer-lasting and more affordable cigarette during the recession. The company continued to promote the brand through the first quarter in the face of significant competitive promotional activity. Pall Mall's promotional levels have moderated in the second quarter as the company continues to refine its strategic approach. We have gone much more to an everyday low price type of promotion with Pall Mall that has a lot of different geographic variables. And the net result of that is that we have moderated the overall investment in that promotion.
Ivey: The growth brands (i.e., Camel and Pall Mall) now represent just about 50% of R.J. Reynolds' volume. As you know, over the past five years, we discontinued 70% of the original SKUs (brands other than growth brands: Camel and Pall Mall).
Ivey: Santa Fe subsidiary posted double-digit volume and earnings growth in the quarter. (California - AG Brown - Sante Fe Natural Tobacco Company must disclose its tobacco no safer/healthier than other tobacco products..)
Concerning the Canadian government settlement, as announced this month, R.J. Reynolds and its affiliate, Northern Brands International, have resolved civil claims and criminal charges related to cigarette smuggling in Canada in the 1980s and '90s. These settlements eliminate the uncertainties, expense and distraction that were associated with those claims. (Canada - tobacco firms settle cigarette smuggling case..)
Smokeless Tobacco
Reynolds American and other tobacco companies are focusing on cigarette alternatives -- such as snuff and chewing tobacco -- for future sales growth as tax increases, smoking bans, health concerns and social stigma make the cigarette business tougher.
Ivey: outlook for category growth in smokeless for 2010. Question: Should we expect a similar level of growth this year as we saw last year? Is that in your expectations? Our expectations are in this 5% to 6% range as we look through the year for moist-snuff.
A number of times we have remarked what a smart move it was for Reynolds to acquire Conwood. Philip Gorham, CFA morningstar.com put it perfectly: Conwood, the smokeless tobacco segment, has been the jewel in Reynolds' crown, providing top-line growth and enhanced profitability without much of the litigation that has hindered the cigarette industry for years. Conwood maker of Grizzly to change name to American Snuff Company..
Susan Ivey: Turning to American Snuff, American Snuff's first quarter performance also continued to show strength and resilience amid intensified competitive pricing and promotions.
American Snuff’s moist snuff volumes during the first quarter of this year, at 85.7 million cans, were up by 12.2 per cent on those of the first three months of 2009.
Sales of Grizzly increased by 11.7 percent to 72.6 million cans, sales of Kodiak rose 12.0 per cent to 12.0 million cans and sales of other brands were up by 46.9 percent to 1.2 million cans. American Snuff’s share of the domestic market decreased by 0.7 of a percentage point to 28.1 per cent, with Grizzly’s share down by 0.7 of a percentage point to 24.0 per cent and Kodiak’s share unchanged at 3.8 per cent.
Grizzly, American Snuff's flagship brand, posted a significant increase in first quarter shipment volume despite intense competitive pricing and promotional pressures. Grizzly's share of shipments to retail declined in the first quarter due to distortions caused by substantially higher competitive promotional shipments. However, on a consumer off-take basis, which better reflects actual retail sales, Grizzly's share was up, reflecting the brand's strong value and equity. American Snuff further enhanced Grizzly's value and quality perceptions with the March introduction of embossed metal lids across the brand styles.
Grizzly also continued to post first quarter volume and share gains with its pouch products, delivering especially strong growth on Grizzly Wintergreen pouches. Adding to Grizzly's appeal among a broad base of moist-snuff consumers was the introduction of Grizzly 1900 Long Cut, a natural product with a traditional long cut. This product has performed very well in the first few months.
Later in the quarter, American Snuff improved its premium positioning with packaging upgrades, which further enhanced Kodiak's image. Kodiak's share remained steady in the first quarter, while generating double digit volume growth. And the company is also improving its premium position with Camel Dip, which leverages the brand's authentic heritage with packaging and product innovation.
Turning to American Snuff, American Snuff's first quarter performance also continued to show strength and resilience amid intensified competitive pricing and promotions. Despite these challenges, the company held adjusted operated income steady. In addition, they increased their adjusted operating margins. American Snuff also increased its moist-snuff shipment volume.
Grizzly, American Snuff's flagship brand, posted a significant increase in first quarter shipment volume despite intense competitive pricing and promotional pressures. Grizzly's share of shipments to retail declined in the first quarter due to distortions caused by substantially higher competitive promotional shipments. However, on a consumer off-take basis, which better reflects actual retail sales, Grizzly's share was up, reflecting the brand's strong value and equity. American Snuff further enhanced Grizzly's value and quality perceptions with the March introduction of embossed metal lids across the brand styles.
Grizzly also continued to post first quarter volume and share gains with its pouch products, delivering especially strong growth on Grizzly Wintergreen pouches. Adding to Grizzly's appeal among a broad base of moist-snuff consumers was the introduction of Grizzly 1900 Long Cut, a natural product with a traditional long cut. This product has performed very well in the first few months.
Later in the quarter, American Snuff improved its premium positioning with packaging upgrades, which further enhanced Kodiak's image. Kodiak's share remained steady in the first quarter, while generating double digit volume growth. And the company is also improving its premium position with Camel Dip, which leverages the brand's authentic heritage with packaging and product innovation.
The company said volumes of its Kodiak and Grizzly smokeless tobacco grew 12.2 percent compared with the year-ago period.
American Snuff’s moist snuff volumes during the first quarter of this year, at 85.7 million cans, were up by 12.2 per cent on those of the first three months of 2009.
Sales of Grizzly increased by 11.7 per cent to 72.6 million cans, sales of Kodiak rose 12.0 per cent to 12.0 million cans and sales of other brands were up by 46.9 per cent to 1.2 million cans.
American Snuff’s share of the domestic market decreased by 0.7 of a percentage point to 28.1 per cent, with Grizzly’s share down by 0.7 of a percentage point to 24.0 per cent and Kodiak’s share unchanged at 3.8 per cent.
Grizzly, American Snuff's flagship brand, posted a significant increase in first quarter shipment volume despite intense competitive pricing and promotional pressures. Grizzly's share of shipments to retail declined in the first quarter due to distortions caused by substantially higher competitive promotional shipments. However, on a consumer off-take basis, which better reflects actual retail sales, Grizzly's share was up, reflecting the brand's strong value and equity. American Snuff further enhanced Grizzly's value and quality perceptions with the March introduction of embossed metal lids across the brand styles.
Grizzly also continued to post first quarter volume and share gains with its pouch products, delivering especially strong growth on Grizzly Wintergreen pouches. Adding to Grizzly's appeal among a broad base of moist-snuff consumers was the introduction of Grizzly 1900 Long Cut, a natural product with a traditional long cut. This product has performed very well in the first few months.
Later in the quarter, American Snuff improved its premium positioning with packaging upgrades, which further enhanced Kodiak's image. Kodiak's share remained steady in the first quarter, while generating double digit volume growth. And the company is also improving its premium position with Camel Dip, which leverages the brand's authentic heritage with packaging and product innovation.
Turning to American Snuff, American Snuff's first quarter performance also continued to show strength and resilience amid intensified competitive pricing and promotions. Despite these challenges, the company held adjusted operated income steady. In addition, they increased their adjusted operating margins. American Snuff also increased its moist-snuff shipment volume.
Grizzly, American Snuff's flagship brand, posted a significant increase in first quarter shipment volume despite intense competitive pricing and promotional pressures. Grizzly's share of shipments to retail declined in the first quarter due to distortions caused by substantially higher competitive promotional shipments. However, on a consumer off-take basis, which better reflects actual retail sales, Grizzly's share was up, reflecting the brand's strong value and equity. American Snuff further enhanced Grizzly's value and quality perceptions with the March introduction of embossed metal lids across the brand styles.
Grizzly also continued to post first quarter volume and share gains with its pouch products, delivering especially strong growth on Grizzly Wintergreen pouches. Adding to Grizzly's appeal among a broad base of moist-snuff consumers was the introduction of Grizzly 1900 Long Cut, a natural product with a traditional long cut. This product has performed very well in the first few months.
Later in the quarter, American Snuff improved its premium positioning with packaging upgrades, which further enhanced Kodiak's image. Kodiak's share remained steady in the first quarter, while generating double digit volume growth. And the company is also improving its premium position with Camel Dip, which leverages the brand's authentic heritage with packaging and product innovation.
Meanwhile, Camel continues to enhance its image as a total-tobacco brand, offering a broad range of innovative products to meet the changing preferences of adult tobacco consumers. In addition to Camel cigarettes and snus, R.J. Reynolds recently introduced Camel Dissolvables and American Snuff Co. introduced Camel Dip.
Camel Snus, the brand’s first smoke-free product, was expanded nationally last year. On a cigarette-equivalent basis, which assumes that a tin of Camel Snus is equal to a pack of cigarettes, Camel Snus had a relatively stable share of 0.2 percent in the first quarter. That brought Camel’s total-tobacco share, which includes Camel cigarettes and snus, to 7.3 percent in the first quarter, down 0.3 percentage points, driven by the cigarette declines. “Snus is still a relatively new tobacco category in the U.S., and we believe that consumer awareness and trial of Camel Snus will benefit from the national expansion of competitive snus offerings,” Delen said.
(Daniel (Daan) M. Delen is chairman, president and chief executive officer of R.J. Reynolds Tobacco Company, the largest subsidiary of Reynolds American Inc.)
Ivey: Sales of Camel Snus have remained relatively stable since its national expansion last year. R.J. Reynolds is simplifying the pricing promotional strategy for Camel Snus and putting more emphasis on engaging and educating consumers about this relatively new product category. R.J. Reynolds believes that the national expansion of competitive Snus products will increase category awareness and will benefit Camel Snus.
Camel’s dissolvable products — Orbs, Sticks and Strips — which were introduced in three lead markets last year, continued to generate good interest. Consumer feedback is being incorporated to improve the products and their packaging, as well as the company’s communications to adult tobacco consumers about these products.
Susan Ivey: I think one thing that's kind of important to note is that our products were not on the market when that study in Pediatrics was done. And so there is no representation really of Camel dissolvables in that study.
She was then reminded - except for a picture of Orbs. Ivey: Correct. There is a picture. There just is not a study. And I think we certainly have gone to great lengths to ensure child-proof packaging and on tobacco behind-the-camera display. So to your other question, we are working with the FDA and their inquiry about dissolvables. As you know, we believe that a harm-reduction strategy and the position from the FDA on that strategy is important to the future of the category. And we will continue to work with them as they go through that process. I think we just have to wait and see, but I do believe that the science should really drive the decision.
Reference: Reynolds American Inc. Q1 2010 Earnings Call Transcript, Seeking Alpha, 4/22/2010; Reynolds reports sharp increase in net income in its first quarter by Richard Craver, Winston Salem Journal, 4/22/2010; Reynolds American Q1 Profits Beats View (RAI, Created by Dividend.com, NASDAQ, 4/22/2010.
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