Tobacco International: Reynolds American Rolls Forward

COMP A N P
Y R OF IL E
Reynolds
American
acquisition of Conwood Company, the
RollsForward
nation's second-largestsmokelesstobacco company. Third-quarter revenue
climbed nearly2 percentto $2.19billion
from $2.15billion last year.
r orftJfue tobaccogiant overcomeschallengesof the
industry through the strengthof its brands and
an innovativemarketingapproach- as well as a
highly touted entry into the smokeless
category.
While the external businessenvironment has become con sider ably
more favorablethan it was severalyears
ago, non-traditional businessfactorsmostly lawsuits,smoking bans, and tax
i ncreases- conti nue to challenge
ReynoldsAmerican, aswell asthe entire
espitea challengingbusinessen-
to just another day at the office for the
i ndustry. N everthel ess, Reynolds
v ir onm ent ,R e y n o l d sAme ri c a n
+^1-^--^
ruudr!u
American keepsroiling along.
Inc. (RAI) continues to move
forward thanks to its creative acquisi-
RAI had about $8 billion in annual
salesand holds 30% of the U.S. market.
tions and sav\y management.But are
Its third-quarter profit rose 45%o,with
^i^-+2
SrdrrL;
BRAND
STRENGTH
In 2005RAI'slargestsubsidiary,
R.].
litigation, smoking bans, tax increases continued strong performanceby R.l.
Reprolds,launcheda new portfolio strat-
and intensifying competition taking a
toll on the second-largest
U.S. cigarette Kool cigarettes,aswell as Grizzly moist-
egy aimed at improving profitability. A
key part ofthis was to createthreebrand
manufacturer-
categoriesfor its products. Camel and
or doesit all boil down
R e y n o l d s Tobacco C o.' s C amel and
snufi which came as part of RAI's May
1 4 NO V E M B E200
R 6 T OB AC C O
IN T E R N AT ION AL
\.ro1 \vereselectedas "investmentprod-
third quarter was marked by the conti n u e d s tro ng grow th momentum of
support brands as marketing efforts are
reduced or eliminated. Further, we see
Conwood.
" Ou r p e rformancei s on track for
-.randsand receivelimited resourcesas RAI to again deliver strong full-year re.he companytries to get greaterefficien- sults," Ivey said. "We are increasingour
;ies out of them. The remaining brands full-year forecastbasedon additional
taLlinto RAI's "non-support" category.
gainsat R.). Reimoldsand Conwood."
increasedcompetitivepressuresin the
menthol category,limiting growth for
-r;ts" and as such receivethe majority of
larketing support.Winston, Salem,Do::1. and Pall Mall are "selectivesupport"
With this strategy,R.l. Reynoldsintendsto accelerategrowth of its two in\.estmentbrands - Camel and Kool so their growth exceedsdeclineson the
company'sother brands. In this way,
"ReynoldsAmerican has offered investorsan extraordinarylevel of wealth
c re a ti o n . Even though i t hasn' t been
smooth sailingas of late, the stock has
returned better than 26% annually over
RAI's menthol brands."
S & P ' s R A I outl ook has i mpr oved,
noting a new marketing strategyand secure price increasesas two key positive
elementsbolstering RAI's short-term
prospects.The fact that Camel and Kool
have continued to grow market sharein
a dynamic and challengingmarketplace
th e l a s t fi ve years," sai ciP eter Gore,
is another encouragingsign. S&P also
cites "synergies"generatedfrom recent
erate total company share growth be-
CFP of financial advisory firm Gore &
Golub LLC in Williamsburg, Va. "Late-
mergersand acquisitionsto begin favorably contributingto RAI's bottom 1ine.
trve e n2 010 and 2012 . Si n c e th e n e w
p o rtfo lio s t r at egy wa s i n tro d u c e d ,
ly, managementhas beenprone to surprise againstestimatedearnings,best-
D uri ng the thi rd quarte r , R. J.
Reynolds'"investmentbrands" Camel
and Kooi continuedto post strong share
th e co m pany plans t o re v e rs ei ts d e clining share-of-market
trend and gen-
Camel and Kool have grown more than
ing the overhanging litigation cloud.
a full sharepoint on a combined basis, T h e re s ti l l i s a compel l i ng story for
and R.l. Reynoldshas cut its rate of to- RAI. That's not to say there is no risk
tal declinein half.
associatedwith it but the tobacco inThe introduction of the new brand
strategycameon the heelsof highly pub-
gains,with a combined increaseof 1.07
sharepoints comparedwith the year-ago
quarter.On a nine-month combinedba-
dustry is still a considerableforce to be
reckonedwith."
si s. the company s tw o i nvest m ent
brandsw ere up 0.9' l sharepoi n t s com -
"We expect revenuesto rise about
6010,"
said Standard& Poor's (S&P) ana-
pared with the prior-year period, con-
trend improvements at R.J. Reynolds lyst Raymond Mathis. "We seea likely
are in line with those expectedfrom the rise in volumes for focus brands Camel
brand-portfolio strategyit put in place and Kool but anticipatecontinued voli n e a rl y 2005. S he als o s a i d th a t th e ume declinesfor select-support
and non-
its overallsharedeclines.
"Reynoldsstill needsto seean even
more significantimprovementin the op-
licized merger-and-acquisition
activity
that includeda mergerwith the U.S. operationsof No. 3 U.S. cigarettemaker
Brown & Williamson (2004)and acquisitions of Lane Limited (2004) and Santa
Fe TobaccoCo. (2002).Synergies
from
the B&W merger have aireadyprovided
Rep-roldsAmerican with some $600 million in annual savings.
"ReynoldsAmerican'syear-to-date
resultsunderscorethe power of our busin e ssmo del and our op e ra ti n gc o m p a nies' inherent strength,"said SusanM.
Ivey, RAI's chairman and c.e.o. "Ninemonth profit gainsfrom eachof our operating units contributed to continued
growth momentum. Our performance
continues to validate that our strategyis
solid,and is dliving results."
Ivey said that continued total share-
tributing to the continuedmoderationof
erating margins for its cigaretteopera-
N OV E IV ]B E
R TOB A C C O
2006
IN TE R N A TIONAL
15
...>C O M P A NYP RO FIL E
tions beforeit can producethe samelevel
of profitability reported by most of its
lion "investment" to fight state-ballot feat this [California] initiative until it is
initiatives on cigaretteexcise-taxincreas- in the hands of the voters," Ivey said at
peers,"noted GreggoryWarren, CFA, a es and smoking restrictions,much of it
Morningstar analyst."The company's in California. Other smoking-ban and
heavierfocus on discount brands has left ta-r fights were on the ballot in Arizona,
the time, adding that the company was
investingmore than half of its opposition
budget in California alone. "Voters have
Nevada, Ohio, South Dakota and Missouri. Thesetlpes of opposition strate-
to make a good deci si on on Nov. 7,
whatever that decision is." Re;'nolds de-
o p e ra ti n g gies are becoming part of every giant top re m iumbr andsand g e n e ra te
baccocompany'slong-rangeplans.
margins in excessof 30o/oannually."
" T h e companyi sn' tl etti ngup to dePart of RAI's strategywas its $40 mil-
rives some 6% of its salesin California.
(Editor'sNote: The resultsof that in-
it well behind Altria and Carolina Group,
both of which have stronger portfolios of
In the Boardroom
vestment,post-ElectionDay, were mixed
for Reynoldsand the otherbig U.S.tobacco companies:I\'ltile vlters shot down the
hugetax hike proposedin the crucial state
of California, as well as Missouri, they
R,A!'sboarciof directors*lect*cjicffrey A. f*kmann, 54, i* gr*up presi- approvedbal l ot measuresi n Ar izona,
dehe had been*.v.[. nf strat*gyand bi:siness
dent il Sct*her.Previor-isly
and Ohio to require smoke-free
f*}" Nevada
for the *orflpnny"i-{*will al$oheve$ngcir}gaflrolintab;lily
velopmer'lt
filnctioils.Hrkffiannwasfnrmerly workplacesand public places,and to indev€lopr*ent
and hlusine$s
RAI'sstrategy
creasetobaccotaxesin South Dakota and
T*
and chieffinanciaicfficer*i Br*wn& Williamson
seninrvic* president
baccoCurp"{B&W}aild l*d ihe in;*grationof that conipany'sU.$' *iga- Arizona.)
Toba*co*4. ir Juiir?*il4.
RAI's total retail market share for
with R.J.Reynol'Js
reiteaild tabaccobusiness
gen*rfii
jo!ned
eild
as
e.v.p'
clrnpany
ihe
E. Juiia'uJildy"Lamb*t*:
the ni ne-month peri od w as 29. 870/ 0,
coilnseleffectlvein $eptemb*r.L*rnbeth,55,wiil al30s*rvses e'v"p"end down 0.35 points. Spendingto combat
generalcounselaf RAI': largestsubsidiary,R.-i.R*ynaldsTohecc*tc"
stateballot initiatives and an 8% voisucce*diilgCharl*sA. Blrxt,'whohas retiredafter ?1 y**r$ with the c*mume decline that was partially driven by
h*th
Fanir.pr*urolislyLamh*thhad beenat DuFoiita*d Coil*coFhi!lipx,
trade-inventory movements weakened
arldinternaticnaliy.
drnrestinally
ea. at RAI's results.
CIin."i.ft*ynaids'Icbacc*
LynnJ" **asleyvrrillretireas president
of BritishArnerithe startof the newyearand be r*placedby the presiilf;ni
THENEWFRONTIER?
SMOKELESS:
can Tcbacc*Ltd.-J*pan.
reDanietr
M. CIeic*u;illrepl*ceBea*leyori Ja*. 1, thoughB*asleywill
Conwood, acquiredfor $3.5 billion, deto *asethe transttion"
maino!"ibnardthrr:ughmid-Fcbruary
livered strong growth for the third quar*easlsr/jcined ReyncldsTcbacco!n 1382 as e m€rketingass!sia:rt ter and the first nine months with adexecutiveviee presid*:niof rflfirai"idrcse ihr*ugh th* rankst* bec*ryre
justed operating income rising 7.4% to
ketingin 1"997.She v;asnamedpfesident*nd chief *ilerai:ngaif!cerin
$73 million. The formerly privately heid
Jenuary20il2.
company is a large player in the moistc{ mark*tingand sal*: in ?*il1
Delenwas named$eni*rvice president
snuff category largely thanks to Grizzly,
which
is
for fiAT'sformerU.S. unit Brcwn& Williarns*nTi:bacc':eorp",
ilnil in
a price-valuebrand that holds 20% of
and bec*mepresid*iltof BAT'sJapanbuu:"ress
nowa fiartCIfF?JR,
Aug*si?C*4.
the market. It nabbed a 3.7 share-point
ffiilves,Reyn*idsAmericananncurcedihe pr*- gain for the first nine months compared
In cther RAI perscnnel
moiion$*f l-is* -H.fialdwelltt s+niorviee ilresideniof h:;mai':rescilrce$ with the sameperiod of 2005.
to senicrvic* presidentnf strategy*nri b,:sinc35d*and Ksrl trr*hitehurst
Conwood manufacturesand sellsin
haeibeenvic* prestdcntnf h*rnan res*ur.*5,wnlie
velopmeilt.Caleiwell
every smokel esscategory,including
of inve*tari'slilt!ons.
had beenv!cenresident
lqJhitehurst
moist and dry snuff, loose leaf, plug and
twist tobaccos.It is the growth leaderin
moist snuff, and Grizzly is the leading
value brand. Conwood's net saiesfor
2005 were more than $450 million with
annual saiesgrowth over 87o during the
last five years.Conwood'spresidentand
JeffreyEckmann,Judy Lambeth,Ken
executives
Fram leftto right:Reynolds
Whit ehur sand
t Lis aC a l d w e l l .
IN T ER N A T IO N AL
1 6 NO V E M B E200
R 6 T O B AC C O
c.e.o.Bill Rossonreports to RAI group
presidentleff Eckmann, who also leads
. ".>. C O M P A NY
P RO F IL E
the company'sLane,SantaFe and GIoba l Produc t s s ubs idi a ri e s(s e e " In th e
Boardroom,"page16).
"We' r e ex c it ed a b o u t C o n w o o d ' s
g ro w t h pr os pec t s ,"s a i d Iv e y . " C o n wood's strong,well-positionedbrands
are gaining share in the growing moist
...prtThereare othercompanies
inter e s te idn s m o k e l e s s ....The
co m p e ti ti veen v i r o n m e nwti l l b e
what i t w i l l b e .t' -
l,
D i a n nMe.N e a cFo
snuff market, and its high margins will
enhanceour ability to continue to pro24.5o/o
of U.S. salesvolume. Midnight
vide an excellentreturn to our share- bled its total share of the moist-snuff
market during the last six years.
holders."
Special,a value brand that has under-
C onwood br an d s i n c l u d e H .B.
ReynoldsAmerican will combine its
gone rapid growth over recentyears,has
Scotts,Morgan's,and Levi Garrett in the
L a n e L i mi ted subsi di ary, currentl y
7.60/oof retail volume. Kite, launchedin
loose leaf category;Kentucky King and
h e a d q u arteredi n Tucker, Ga., w i th
1934,is the leadingmenthol RYO in the
Moore's Red Leaf in the Twists group;
Conwood in order to drive growth in
United States,with 5.2o/oof retail sales
Dental Mild and Sweet,and Levi Garrett
vol ume. Four other R Y O br ands -
snuff; Taylor's Pride, Cannon Ball, and
the companies'portfolio of other tobacco products (OTP). The headquartersof
Bl a ck M ar ia in pl u g s ; Gri z z l y a n d
Cougar in the moist price-value seg-
th e c o mbi ned compani es w i l l be i n
Memphis, Tenn., and fuil integration of
ment; and Kodiak and Hawken in the
mo i st - pr em ium gr o u p . It i s th e o n l y
the two is expectedto be completedby
baccocompanyAltadis)- accountfor a
gling Lane 38.8% of total
further 1.4o/o,
year-end2007.
U.S. RYO salesvolume before affiliating
company to compete in a1lfive smokeholding the No. 1 or No.
lesscategories,
Lane Limited has the leading rollyour-own brand in Bugler.Launchedin
with Conwood.
2 position in each.It's more than dou-
the United Statesin 1932,it accountsfor
ter little cigars,the biggestlittle-cigar
IN T ER N A T IO N AL
1 8 NO V E M B E200
R 6 T O B AC C O
Samson,Roll Rich, Jester,and Gauloises
(marketedon behalfof the Europeanto-
Additionally, Lane marketsWinches-
related to the distrib ra n d, wit h 15. 9%of U .S . l i ttl e -c i g a r contract for ser-vices
products
for one year.
saleswhile Captain Black accountsfor bution of Lane
4.4o/oof the category.Lane also markets
th e Dunhill A ged a n d th e D u n h i l l
Dr. Grabow is the best-sellingbrand of
pipesin the United States,annuallypro-
Signedrangesof premium cigarsin the
United Statesunder an agreementwith
ducing some250,000pipes.
"This sale allows Lane to more fully
shareholdervalue and are certainlycontributing to the continued strong stock
t'
-prfnrmanre
On a competi ti ve front, Swedish
Match announced in October that it will
partner its North American unit with
British AmericanTobacco,plus 20 styles focus on its core businessand growth
of Holland's Schimmelpenninckcigars, strategy," said Nick Bumbacco, Lane
and produces bulk pipe-tobaccosfor p re s i d e n t and c.e.o. " S el l i ng the D r.
Lori l l ard Tobacco C o., the par ent of
smoke shops.Lane's Captain Black is Grabow businessis the best fit for Lane
one of America'sleadingpipe-tobacco and Dr. Grabowwhile Lanecontinuesto
brands,accountingfor I 2.10/oof pipe to- focus on manufacturing and marketing
ed States.An official launch date has not
C arol i na Group, to devel op and sell
smokelesstobaccoproductsin the Unitbeen set, but accordingto a company
statementit will be "in the not-too-distant future."
bacco sold in the country. It's followed
by Sir Walter Raleigh,with 5.1%. Lane
premium tobaccoproducts."
"Re1'noldsmanagementhas contin-
Altria Group Inc.'s Philip
Separately,
exports many of its products, with the
leading recipient countriesbeing lapan,
implement
ued to craft and successfully
a businessmodel focusedon identifica-
Morris USA launchedTaboka,a smoke-
Nigeria,Turkey.and Russia.
tion with and developmentof its extensive brand portfolio," said Gore. "Since
free,spit-freetobaccopouch product, in
a test market in luly. ReynoldsAmeri-
and Dill's pipe cleanersto International
LLC for $4.3 milPipes & Accessories
lion. The saleincludes the transfer of
can'sR.j. Repolds subsidiaryis current2004,they'veshown their prowessto ac- ly conducting a two-market test of its
quire and mergesignificantand relevant own "spitless"smokelesstobaccoprodbrands,and addingthem to the stableof uct, calledCamelSnus.
"There are other companiesinterests tro n g c ategory performers, as w i t-
ownershipof the Dr. Grabow manufacturing facility in Sparta,N.C., aswell asa
n e s s e db y the C onw ood acqui si ti on. ed in the smokelesstobacco category,"
Theseefforts have createdsubstantial sai d D i anne M. N eal , R A I e. v. p. and
Earlier this year Lane sold its Dr.
Grabow line of pipes and pipe filters,
19
IN TE R N A TI O NAL
TOB A C C O
N OV E MB E2006
R
,">
CO I V I P A NY
P RO F IL E
chief financial officer. "The competitive
environment will be what it will be."
nounced it will voluntarily extend comparableguidelinesto all of its brands.Un-
HAVINGITS DAYSIN COURT
only venuesand communications, R.J.
In mi d- O c t ober , R. J .R e y n o l d sa n d a
Relnolds' specialtyblendswill not usethe
are arguing that smokers of so-called
"light" cigaretteswere defraudedinto
multi-state group of attorneysgeneralan-
name of a fruit, candy,or alcoholicbever-
thinking that they were saferthan regu-
der the agreement,other than in adult-
defendantstheir requestedappeal of a
lower court's decision,which granted
class-actionstatusto the suit. Plaintiffs
nounced a collective agreementon the
age in the future naming of its cigarette lar ones.Should they be allowedto pro-
future marketing of specialtyflavoredcig-
brand sryles.
arettesto adult smokers.
Most of R.J.Reynolds'specialtyfla"T his agr eem e n t c o d i fi e s R .1 . vored cigaretteswere marketed as part
ceed,they are seekingmore than $200
billion in damagesto be paid collectively from the nation's largest cigarette
Reynolds'practicefor some time of not
of the Camel Exotic Blend family of
manufacturers.It remains to be seenif
using languagedescribing fruit or candy
s ty l e s , w h i ch w ere ori gi nal l y i ntro-
the positive momentum generatedby
flavors in magazineand newspaperad-
d u c e d i n 1999 as a superpremi um-
vertising, or point-of-saie communica-
dismissalsin the Price and Engle cases
p ri c e d p ro duct. In total , these styl es will carry into the Schwabcaseand de-
tions in non-age-restricted
venues,"said
representedlessthan 1/10th of Lo/oof
liver a favorabieoutcome for the tobac-
L).tt I. Beasley,R.l. Repolds' president
and chief operatingofficer. (In late No-
th e c o mpany' s annual ci garettevol -
co companies.
u me . In M ay, R .]. R eynol ds ceased
vember, Beasleyannounced her retire-
manufacturing the last three of its re-
Reyroids American continues to face
challenges,some unique to the compa-
ment from the company, effectiveJan. 1.
See"In the Boardroom,"Page16.)
maining Camel Exotic BIends.
ny, others impacting the entire industry.
In November, a U.S. federal appel-
B ut the company conti nues t o show
In addition to the conditions of the
Iate court granted a permanent stay of
considerablestrength, and no matter
agreement,which are specificto the com-
the proceedingsin the Schwabcase.The
what the outcomes,its future will be in-
pany's speciaityblends,R.f. Relnolds an-
court also grantedthe tobaccocompany
A t B oegl iw e have tomorrow ' s embossi ngsol uti on
on hand today: S hadow E mbossi ng.
O n:y tool to comm,uni cate,your
brands' uni
. q.ueness,
enabl i ngyou to appl y j ust about any desi gn vi si on
on the i nner l i ner.
:lialr,:]',1,
itjriil',il.j
!*:::1;;1
;,a,:t,r:.,a.:::
S€ltAllsnment
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P-qli9':vlr::f
$E T T I N G
@-
S T A N D ARDS
& Oulck-E{hrnqe
H.ad
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trry r*'"*rffi
l.tn:::re."i::,il:"
MsILnolbr
Syd€m
Boegli-Gravures
S.A.
R O" Box32
Gare24 - 26
CH-2074
Marin
Switzerland
Tel.:+41 32 753 7080
Fex:+41 32 753 7082
wwrv,boegli.ch
bg@boegli,ch
q
fr
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