RAI Puts 'Transformational Year' in the Books

WINSTON-SALEM, N.C. — Reynolds American Inc. (RAI) had a busy 2015 — its acquisition of Lorillard Inc. was just one achievement — and the tobacco company is charging full-steam ahead into 2016.

"2015 was truly a transformational year for RAI and its operating companies," Susan Cameron, president and CEO of RAI, said Thursday during the company's fourth-quarter 2015 earnings call. "We've started the new year with significant momentum, especially in returning value to our shareholders." 

Since the first of the year, the company has taken three steps in particular that benefit its investors:

• RAI is increasing its dividend by 16.7 percent;
• RAI completed the sale of the Natural American Spirit business outside the United States for $5 billion in cash; and
• RAI announced a tender offer and redemption for the early repayment of some of the company's outstanding debt.

"We're taking all these steps by still investing in our core businesses, as well as in innovations that are key to the success of our long-term growth and transformation strategies," Cameron noted.

Case in point: The company created RAI Innovations Co., which is focused on product development and commercialization of leading-edge vapor and nicotine products, as CSNews Online previously reported. The next-generation subsidiary will drive speed to market with new products across a range of platforms, according to Cameron.

Also in the vapor realm, a collaboration underway between RAI's R.J. Reynolds Tobacco Co. and British American Tobacco (BAT) "will facilitate the companies' efforts to more efficiently meet the preferences of adult tobacco consumers in a rapidly evolving marketplace," the chief executive said.

One of the beneficiaries of this "next-generation" focus will be the company's VUSE digital vapor cigarette, which continues to perform well in traditional retail channels, according to Cameron. VUSE introduced four additional styles in September, all well-received by adult tobacco consumers, she reported. The company also debuted VUSE Connect online in the fourth quarter. 

Starting next month, VUSE Fob will be available. In addition, VUSE Port, a liquid-based tank system, and VUSE Pro, a closed cartridge system, will be introduced later this year.

"Adult tobacco consumers are looking for a vapor experience that delivers the performance and satisfaction of a tank with the simplicity of a cigalike," Cameron explained. 

VUSE's innovation pipeline comes at a time when adult tobacco consumers appear to be backing away from the vapor segment. However, she said the new products rolling out are aimed at meeting the needs of consumers that are not currently being met.

"Our consumer data continues to show growth in trial, while the category overall is flat. I think consumers continue to desire to find satisfaction in non-combustible products," the executive said, adding that the VUSE innovations are aimed at delivering against the crux of the issue, which is improving the satisfaction without messing around with tanks and open liquids. 

"We will be primarily in the traditional channels ... that is where people buy their tobacco products, and we will use marketing materials to talk about the differences in these new innovations vs. cigalikes and encourage trial," Cameron added. "Anytime you launch a new product, encouraging trial is part of that marketing plan."

MENTHOL MOVEMENT

In the combustible arena, RAI is making strides in its integration of the Newport brand. The company added Newport to its portfolio as part of the Lorillard acquisition.

RAI is on track to complete the manufacturing transition to its Tobaccoville facility this year. In addition, Newport was added to R.J. Reynolds' retail contracts in mid-November following the expiration of the initial five-month standstill period.

"The brand's expanded presence is delivering additional gains," stated Cameron. "We saw growth in both the premium menthol styles, as well as in Newport Red. We also believe contributing to that, in addition to the contracts and the larger sales force, is the consumer engagement strategy. We are out there talking to smokers and talking about the Newport brand in markets where it really hasn’t been represented." 

The company will provide more insight into what it is doing with the various styles in the coming months, Cameron noted.

"We see upside potential in certainly both the menthol and non-menthol," she remarked.  

Reynolds American Inc., based in Winston-Salem, is the parent company of R.J. Reynolds Tobacco Co., Santa Fe Natural Tobacco Co. Inc., American Snuff Co. LLC, Niconovum USA Inc., Niconovum AB, and R.J. Reynolds Vapor Co. Its brands include Newport, Camel, Pall Mall, Natural American Spirit, Grizzly, VUSE and ZONNIC.