Reynolds American Inc. (NYSE: RAI) today announced strong gains in second-quarter and first-half 2006 diluted EPS - on both a reported and an adjusted basis. Adjusted EPS of $2.51 for the quarter and $4.39 for the half was up 32.8 percent and 20.9 percent respectively, benefiting from improved pricing, productivity and strong R.J. Reynolds volume. The company revised its forecast and now expects full-year 2006 reported EPS of $8.30 to $8.50.
Overview
"Reynolds American's first-half results clearly demonstrate the company's ongoing progress in delivering against its business plan and building long- term shareholder value," said Susan M. Ivey, RAI's chairman, president and chief executive officer.
During the first half of 2006, the company expanded the scope of its business by entering the smokeless tobacco category with the acquisition of Conwood. RAI achieved additional merger synergies and met productivity objectives, and the company's largest operating subsidiary, R.J. Reynolds, further increased the strength of its investment brands.
"In addition," Ivey said, "Reynolds American continues to enjoy a more favorable industry environment, which was further enhanced by a recent ruling that eliminated the $145 billion judgment against the industry in the Engle class-action lawsuit.
"Our year-to-date performance and our ability to deliver sustainable earnings growth drove our decision, announced last week, to increase RAI's dividend by 20 percent and split our stock on a two-for-one basis," Ivey said. "It is clear that Reynolds American continues to build strength."
R.J. Reynolds
"R.J. Reynolds' performance during the first half of 2006 again demonstrated the company's operational and marketplace strength," said Lynn J. Beasley, R.J. Reynolds' president and chief operating officer.
R.J. Reynolds' adjusted operating income of $554 million for the second quarter and $957 million for the first half was up 29.7 percent and 16.0 percent respectively. That performance was primarily the result of pricing gains and productivity improvements, coupled with strong shipment volume.
R.J. Reynolds' shipment volume was essentially flat for the first half of the year. "However," Beasley noted, "we estimate that our retail consumption was down about 4 percent."
First-half volume reflected an extra shipping day and was also impacted by a wholesale-inventory build-up prior to the July 4th holiday and the company's successful implementation of a new SAP systems platform in early July. These dynamics inflated first-half volume and enhanced operating income and margins.
"Full-year shipment volumes should be down approximately 4 percent, consistent with the consumption decline during the first half," Beasley said. "We expect second-half volume to be adversely impacted as the trade brings inventories back in line with consumption. In addition, R.J. Reynolds' second-half operating earnings will be affected by incremental investments of about $40 million to address state ballot initiatives on cigarette taxes and smoking bans."
First-half marketplace performance reflects the continued success of R.J. Reynolds' brand portfolio strategy. Total retail market share was 29.92 percent, down 0.42 points for the first half, as expected declines of the company's selective support and non-investment brand categories offset the continued strong performance of the company's two investment brands,
Camel cigarettes and
Kool cigarettes.
Camel cigarettes and
Kool cigarettes continued to build strength with a combined first-half share of 10.38 percent, up 0.83 share points from the first half of 2005. The 2006 first-half share for
Camel's filtered styles was 7.28 percent, up 0.66 points from the prior-year period. Kool delivered a 0.17 share-point gain, boosting its first-half share to 3.10 percent.
"This momentum reflects the focus that
Camel cigarettes and
Kool cigarettes are receiving as investment brands, as well as the strong positioning of the core brand-styles and continuing innovations on both brands," Beasley said. "In the second quarter,
Camel's innovations included the launch of a two-market test of
Camel Snus, a smokeless tobacco option that has the advantage of being spitless."
Conwood
Reynolds American acquired Conwood Company, L.P., the nation's second- largest smokeless-tobacco manufacturer, on May 31, 2006. Consequently, only Conwood's June operating income of $27 million is included in RAI's consolidated results for the second quarter and first half of 2006.
To enhance understanding of Conwood's underlying performance, RAI is providing adjusted pro-forma results, computed as if Conwood had been owned by RAI since the beginning of 2005. On this basis, Conwood delivered strong gains in volume, share and operating income for both the second quarter and the first half of 2006, compared with the same periods in 2005.
On an adjusted pro-forma basis, Conwood's second-quarter adjusted operating income climbed 12.3 percent to $73 million. First-half adjusted operating income rose 16.7 percent to $140 million.
During both periods, the company continued to show its strength as the growth leader in the moist-snuff category. Conwood finished the first half of 2006 with a moist-snuff share of shipments of 24.9 percent, up 2.7 points from the prior-year period.
Driving Conwood's results is Grizzly, a price-value brand that continued its strong growth, posting a 3.7 share-point gain from the prior-year first half. Grizzly was introduced only five years ago, but it already commands about 19 percent of the moist-snuff market.
Conwood is the only smokeless tobacco company that competes in all five smokeless tobacco categories. The company holds the No. 1 or No. 2 position in every category, and it has more than doubled its total share of the moist- snuff market in the past six years.
REVISED FULL YEAR FORECAST
"We are pleased with Reynolds American's performance in the first half. For the year, we now expect reported EPS of $8.30 to $8.50 on a pre-split basis," said Dianne M. Neal, RAI's chief financial officer. "This reflects some additional upside that is primarily due to incremental tax gains, as well as the impact from the Conwood acquisition."
Neal said that Conwood promises to continue delivering strong results during the second half of the year. "However," she said, "their earnings will be only slightly accretive in 2006, as the interest expense associated with financing the acquisition largely offsets the operating income that Conwood will generate during the remainder of the year."
Neal noted that the company's particularly strong first half has put it ahead of its full-year projection on a pro-rata basis. "The second half of the year - the third quarter in particular - will be significantly impacted by the R.J. Reynolds first-half shipping imbalance," Neal said. "The second half will also be adversely affected by an investment of approximately $40 million that R.J. Reynolds is making to combat state ballot initiatives on cigarette excise tax increases and smoking restrictions."
Neal said that the reported EPS estimate also includes the after-tax effect of:
In addition, she noted that the revised year-end cash forecast does not include $100 million of cash collateral for the appellate bond in the Engle class-action lawsuit. "At this time it is difficult to accurately predict when these funds will be returned," she said, "so we have excluded them from our year-end cash forecast.
"We expect our balance sheet to remain strong," Neal said. "We should end the year with cash and short-term investments of about 2.4 billion dollars. We expect debt at year-end of about 4.7 billion dollars."
CONFERENCE CALL WEBCAST TODAY
Reynolds American will webcast a conference call to discuss first-quarter 2006 results at 9:30 a.m. Eastern Time on Wednesday, July 26, 2006. The call will be available live online on a listen-only basis. To register for the call, please visit the "Investors" section of http://www.reynoldsamerican.com/. A replay of the call will be available on the site for 30 days. Remarks made during the conference call will be current at the time of the call and will not be updated to reflect subsequent material developments. Although news media representatives will not be permitted to ask questions during the call, they are welcome to monitor the remarks on a listen-only basis. Following the call, media representatives may direct inquiries to Seth Moskowitz at (336) 741-7698.
RISK FACTORS
Statements included in this news release that are not historical in nature are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding RAI's future performance and financial results inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
These risks and uncertainties include:
Due to these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this news release. Except as provided by federal securities laws, RAI is not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ABOUT US
Reynolds American Inc. (NYSE: RAI) is the parent company of R.J. Reynolds Tobacco Company; Conwood Company, L.P.; Santa Fe Natural Tobacco Company, Inc.; Lane Limited; and R.J. Reynolds Global Products, Inc.
Copies of RAI's news releases, annual reports, SEC filings and other financial materials are available at http://www.reynoldsamerican.com/.
