Reynolds American Wraps Up Busy Third Quarter

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Reynolds American Wraps Up Busy Third Quarter

By Melissa Kress, Convenience Store News - 10/27/2015

WINSTON-SALEM, N.C. — In Reynolds American Inc.'s (RAI) third-quarter earnings call Tuesday morning, President and CEO Susan Cameron said the company had "a very busy quarter." But that may be an understatement.

In late June, RAI closed on its merger with Lorillard Inc., acquiring some brands and divesting others to ITG Brands LLC. Then in September, RAI operating company R.J. Reynolds Tobacco Co. signed a technology-sharing term sheet with British American Tobacco (BAT).  

Following close on the heels of that news, another RAI operating company R.J. Reynolds Vapor Co. introduced four new flavors to its VUSE digital vapor cigarette line. The company also consolidated VUSE manufacturing at R.J. Reynolds' Tobaccoville facility.

The end of September saw RAI reach an agreement to sell the international rights to its Natural American Spirit brand name and associated trademarks to the Japan Tobacco Group of companies (JT Group). 

"As I said before, our operating companies have a key advantage to offering a diversified product portfolio across tobacco categories with a range of distinctive brands at different price points. And this broad portfolio is also aligned with key consumer macro trends that are driving brand choice," Cameron said. "In addition, our company's strategy is to maximize the performance of the entire portfolio with each of the key brands playing a distinctive role."

Newport News

The three-way deal between RAI, Lorillard and ITG Brands brought the Newport cigarette brand into the RAI fold, carrying with it "significant momentum," Cameron noted, calling Newport a "major highlight of the quarter."

The reciprocal manufacturing contract with ITG will continue into later next year, but the transfer of equipment to the Tobaccoville facility is underway.

"Under the route-to-market agreement, no changes can be made to existing retail contracts until the middle of next month, but R.J. Reynolds is currently selling in new retail contracts and we're confident Newport's expanded presence will drive further growth to the brand," Cameron explained. 

In addition, the company's marketing and sales teams are focused on doing the necessary consumer research on Newport and identifying additional growth opportunities for the brand, as well as the company's other brands Camel and Pall Mall, the CEO said during Tuesday's earnings call. 

Digital Space

Meanwhile, VUSE performed well in the third quarter, increasing its No. 1 share position in the convenience store channel, according to the company. The digital vapor cigarette brand also launched four new styles: Berry, Mint, Crema and Chai.

According to Cameron, adult smokers have voiced their desire for a variety of options as they make the move toward smoke-free products.

VUSE continues to invest in its development pipeline of innovation, and more details will be available at RAI's Investor Day in November, she said.

International Moves

RAI's proposed sale of Natural American Spirit outside the United States to JT Group carries a value of approximately $5 billion, as CSNews Online previously reported. The purchase does not include the rights to the Natural American Spirit brand name and associated trademarks in the U.S. market, U.S. duty-free locations, U.S. territories or in U.S. military outlets, all of which will be retained by RAI subsidiary Santa Fe Natural Tobacco Co. Inc. 

"We believe it's a great deal. It will allow our companies to focus on brand growth here at home, while the strength of JT Group's international capabilities will support the tremendous growth potential for Natural American Spirit overseas," Cameron said. 

The transaction still needs regulatory approval in several countries and that is expected to happen early next year.

Another international development was the signing of a technology-sharing term sheet between R.J. Reynolds and BAT that provides a framework for collaboration and mutual cross-licensing of vapor product technologies through 2022.

Both companies are still negotiating the specifics of the agreement and they expect to reach a definitive contract by the end of the year, according to Cameron.

Regulatory Front

In response to the Food and Drug Administration's ruling that four of R.J. Reynolds' products are not substantially equivalent to their respective predicate products, the company immediately stopped sales and notified its trade partners. R.J. Reynolds also took the same action on Camel White styles because the products had the same characteristics as the Pall Mall styles impacted by the ruling.

"I remind you these cigarette styles represent a very small portion of R.J. Reynolds' business and we believe R.J. Reynolds will capture a majority of the volume from the discontinued styles," Cameron said.

The company disagrees with the ruling and is exploring its options, she added.