US: ITG Confirms Production Job Cuts Are Coming

Source from:  Winston-Salem Journal 02/19/2016

ITG Brands LLC confirmed to employees Wednesday what they already knew was coming - production job cuts - but did not disclose when and how many.

A key part of Reynolds American Inc.'s $29.25 billion megadeal for Lorillard Inc. last year was a reciprocal manufacturing contract between ITG and R.J. Reynolds Tobacco Co.

With the purchase, Reynolds American acquired Newport, the top-selling menthol and No. 2 overall traditional cigarette brand. As part of gaining regulatory approval of the deal, Reynolds sold its Kool, Salem and Winston brands, and Lorillard sold Maverick and blu eCigs. The buyer was ITG's parent company, Imperial Brands Plc, which spent $7.1 billion for the five brands and the remaining Lorillard assets outside Newport.

The reciprocal agreement meant ITG production workers in Greensboro continued to make Newport during a production transfer initially projected to take up to 18 months. ITG has 1,700 employees in Greensboro, including 1,100 production workers, spokesman Mark Smith said.

Meanwhile, Reynolds production workers in Tobaccoville continued to make Kool, Salem and Winston.

ITG employees were told during a meeting Wednesday that the reciprocal manufacturing is likely coming to an end as early as June. Reynolds had no comment when asked about the end of reciprocal manufacturing.

Employees were reminded that ITG Brands has, by its estimate, about a 10 percent market share. That's down from the 15 percent Lorillard had when the deal closed, 80 percent of which came from Newport.

"When the reciprocal manufacturing agreement we have with Reynolds winds down, production will be further reduced," ITG said. "We are looking at plans to deal with that, and we will communicate those plans when they are finalized to the union that represents our hourly employees and to other stakeholders."

Smith said he had "no idea when job cuts could begin" or if they will affect ITG's Reidsville manufacturing plant or Danville, Va.'s leaf-processing and purchasing facility.

Newport's cigarette volume was 32.9 billion sticks in fiscal 2014.

By comparison, the cigarette volume of the four traditional brands ITG acquired was a combined 18.9 billion sticks, according to Reynolds and Lorillard financial data. ITG's overall production was estimated at 26.5 billion sticks annually.

Getting ITG from 4 percent to 10 percent market share was a key factor in federal regulators approving the megadeal since Philip Morris USA and Reynolds combined control about 84 percent of the market.

However, Wells Fargo Securities analyst Bonnie Herzog said in a January report that, according to Nielsen data, ITG's market share was down to 7.4 percent overall in December.

That the production transfer is being completed sooner is not surprising given that Reynolds gave management - minus top executive Susan Cameron - and employees a "game-changer" performance-based incentive toward ensuring a smooth integration of Newport. The award payout, if achieved, would be made by March 15, 2017.

Alison Cooper, Imperial's chief executive, said in an earnings report statement Feb. 11 that "the ITG Brands team has made excellent progress in the quarter, successfully executing our retailer and wholesale programs and establishing the foundations for a year of strong delivery."

Imperial made Winston a growth brand - one of 10 globally - effective Oct. 1. Those 10 brands receive the bulk of Imperial's marketing and innovation spending. Winston's market share has held at 2 percent since the deal, leaving it among the Top 10 U.S. brands.

The first major test of ITG's retail strategy began Nov. 16, when Reynolds' six-month agreement not to change its retail marketing strategy expired.

Newport is now in Reynolds' every-day-low-pricing strategy.

The program is a voluntary retailer contract in which participants must agree that Pall Mall is the lowest-priced cigarette in their stores.

The current retailer participation rate is 60 percent. Herzog projects that Reynolds could reach 75 percent participation. Enditem