US: Newport Sales, Pricing Hikes Push Reynolds'' Profit Higher in Third Quarter

Source from:  Winston-Salem Journal 10/28/2015

The first full quarter of Newport revenue, along with higher cigarette pricing, bolstered Reynolds American Inc.'s third-quarter net income by 40.7 percent to $657 million.

Reynolds reported Tuesday having $781 million in adjusted net income when excluding integration costs with Newport, asset impairment and exit charges associated with the three brands it sold, and Engle progeny legal costs.

Reynolds closed June 12 on its $29.25 billion purchase of Lorillard Inc., essentially to acquire Newport, the nation's top-selling menthol cigarette and No. 2 overall traditional cigarette.

Diluted earnings were 46 cents a share, up 2 cents from a year ago. Adjusted earnings were 55 cents, up 8 cents.

The average earnings forecast is 54 cents by six analysts surveyed by Zacks Investment Research. Analysts typically don't include one-time gains or charges in their forecasts.

Wells Fargo Securities analyst Bonnie Herzog said Reynolds showed "robust growth," in part because of a pricing increase of 6 percent during the quarter.

Reynolds raised the lower end of its fiscal 2015 earnings guidance by 4 cents to a range of $1.94 to $2. The upper range was unchanged.

"Our operating companies delivered excellent key-brand performance in the third quarter, and that helped drive further gains in Reynolds American's net sales, earnings and margin," Susan Cameron, Reynolds' president and chief executive, said in a statement.

"In addition to these strong results, I'm pleased to report that the integration of Newport is going smoothly. There's still significant work to be done in our integration, but we're making great progress."

Reynolds began distributing Newport product June 15. During its first full quarter as a Reynolds brand, Newport had 8.8 billion cigarette sticks shipped.

To put that into perspective, No. 3-selling Camel had 5.5 billion cigarette sticks shipped, down 0.2 percent, while No. 4-selling Pall Mall had 5.1 billion cigarette sticks, down 0.4 percent.

Overall sales jumped 41.1 percent during the quarter to $3.16 billion.

Cameron said Newport benefited from a doubling of its sales force overnight with the acquisition, which she suggested contributed to sales growth along with "the natural momentum" the brand carried when it came to Reynolds.

Analysts say Lorillard had been content with a status quo marketing strategy with Newport because of its status at top-selling menthol cigarette.

R.J. Reynolds Tobacco Co. representing $2.63 billion (up 46.2 percent), Santa Fe Natural Tobacco Co. $218 million (up 21.8 percent), American Snuff Co. $210 million (up 3.9 percent), and "all other" subsidiaries $102 million (up 70 percent).

Reynolds has yet to break out R.J. Reynolds Vapor Co. sales as a segment category. The subsidiary recently introduced four new flavors nationwide for a total of six.

Newport's market share rose from 12.9 percent to 13.3 percent. Camel was unchanged at 8.3 percent, while Pall Mall slipped 0.3 percentage points to 7.8 percent.

R.J. Reynolds Tobacco's overall traditional cigarette market share was 32 percent, down 0.1 percentage point year over year.

Herzog projects Reynolds will boost Newport's market share to at least 14 percent, in part through new line extensions, increased advertising and innovation, such as capsule technology, which has been a success in the Camel Crush style.

Newport is expected to benefit from the Nov. 16 ending of Reynolds' agreement with federal regulators to delay adding Newport to its every-day-low-price strategy. The delay gave ITG Brands LLC an opportunity to establish its versions of Kool, Maverick, Salem and Winston at retail.

The program is a voluntary retailer contract that Herzog said has a 60 percent participation rate currently. Retailers that elect to participate must agree that Pall Mall is the lowest-priced cigarette in their stores. Retailers receive greater promotional allowances across many of Reynolds' brands, including Camel and soon Newport.

"Even with the route to market restrictions on retail merchandising in place through mid-November, Newport is demonstrating solid marketplace momentum, and R.J. Reynolds' consumer marketing and sales teams are focused on identifying additional growth opportunities for the brand," Cameron said. Natural American Spirit had a 19.3 percent gain in shipments to 1.3 billion sticks. Its top 10 market share of 1.9 percent is up 0.3 percentage points from last year.

Market share for Grizzly was up 1.4 percentage points to an industry-leading 30.9 percent. American Snuff's overall moist-snuff market share rose 1.3 percentage points to 33.7 percent.

Reynolds said it plans to repay the $450 million of debt that matures on Thursday.

"Our focus remains on deleveraging as quickly and efficiently as possible, while continuing to return excellent value to shareholders," said Andrew Gilchrist, Reynolds' chief financial officer.

Herzog expects that Reynolds will be in position to resume its share repurchase program in early 2016 following the $450 million debt payment.

"We continue to believe Reynolds' position in the overall tobacco industry is very strong, and the potential upside from Newport will be great," Herzog said.

Dan Caplinger, an analyst with The Motley Fool, said Reynolds' strong performance of late goes beyond just the momentum and revenue gained from acquiring Newport.

Caplinger pointed to the growing appeal of super-premium Natural American Spirit even as its marketing pitch of organic, additive-free tobacco is the subject of a Food and Drug Administration warning letter on Aug. 27 and a potential class-action lawsuit in Florida that piggybacks on the FDA letter.

"Natural American Spirit has been able to command higher prices for its product, and that's a trend that Reynolds will watch closely," Caplinger said.

"Beyond the huge gain in revenue that bringing (Newport) onboard will create over the next year, Reynolds American still needs to show the synergies that it promised in the run-up to the merger.

"Although it'll take time for all of those gains to show up, early signs should still be evident."

Herzog expects that Reynolds will be in position to resume its share repurchase program in early 2016 following the $450 million debt payment.

"We continue to believe Reynolds' position in the overall tobacco industry is very strong, and the potential upside from Newport will be great," Herzog said.

Cameron said she hope to come to a definitive agreement on a technology-sharing agreement with British American Tobacco, primarily Vuse, by year's end.

She said it could include a new development phase for heat-not-burn that could provide a faster deployment track in Europe than in domestically. Enditem