RAI Reported EPS up 22.8%; Adjusted EPS up 8.6% WINSTON-SALEM,
N.C., April 27 /PRNewswire-FirstCall/ -- At a Glance - Reported net
income climbed 22.8 percent to $345 million; reported EPS of $2.34,
up 23.2 percent - Adjusted net income of $279 million and EPS of
$1.89 each up 8.6 percent - All operating companies delivered
adjusted profit gains - R.J. Reynolds brand-portfolio momentum
continues - Merger synergies and productivity improvements on track
- RAI to enter smokeless tobacco category: - $3.5 billion
acquisition of Conwood - R.J. Reynolds to test market Camel Snus
All references in this release to "reported" numbers refer to GAAP
measurements; all "adjusted" numbers are non-GAAP. See Schedule 3
of this release for reconciliations of reported to adjusted results
for first-quarter 2006. Reynolds American Inc. (NYSE:RAI) today
announced increased first-quarter 2006 diluted EPS -- on both a
reported and an adjusted basis -- on the strength of the new
business model the company launched last year. Adjusted EPS climbed
8.6 percent from the prior-year period, as the company continued to
improve productivity and pricing. The company said its
first-quarter results were in line with the full-year guidance it
issued on Feb. 7. RAI expects reported EPS for 2006 of $8.00 to
$8.40. First Quarter 2006 Financial Results - Highlights
(unaudited) (all dollars in millions, except per share amounts; for
reconciliations, including GAAP to non-GAAP, see schedules 2 and 3)
For the Three Months Ended March 31, % 2006 2005 Change Net sales
$1,960 $1,957 0.2 % Operating income Reported (GAAP) $446 $467
(4.5)% Adjusted (Non-GAAP) 444 427 4.0 % Net income Reported (GAAP)
$345 $281 22.8 % Adjusted (Non-GAAP) 279 257 8.6 % Net income per
diluted share Reported (GAAP) $2.34 $1.90 23.2 % Adjusted
(Non-GAAP) 1.89 1.74 8.6 % MANAGEMENT'S PERSPECTIVE Overview
"Reynolds American's first-quarter results reflect the progress
that our operating companies continue to make in containing costs,
improving brand performance and increasing profits," said Susan M.
Ivey, RAI's chairman, president and chief executive officer. "To
sum up the quarter: progress continues; profits climb." Ivey noted
that a $65 million benefit from the resolution of prior year's tax
matters contributed to RAI's 22.8 percent increase in first-quarter
reported net income. On an adjusted basis, she said, profit
improvements of 8.6 percent were the result of increased pricing
and productivity, as well as some non-operating cost benefits. "On
an adjusted basis, all of our operating companies increased
quarterly profits," she said, "and our strategies for
investment-brand growth and productivity improvements remain right
on track." Ivey said that the company's first-quarter performance
was marked by dynamics that demonstrate Reynolds American's ability
to strengthen its businesses and deliver sustainable earnings
growth. "For example," she said, "R.J. Reynolds' full-price mix
improved a full percentage point from the prior-year quarter -
which means that higher-priced, more profitable brands are becoming
a bigger part of the business, even as they have continued to
increase in price. "That is especially notable when you consider
that adult smokers are displaying an increased preference for
premium brands at the same time they face inflationary pressures,
as well as higher tax rates," she said. "The fact that full-price
performance improved speaks to the strength of our business model,
as well as favorable industry marketplace dynamics." Ivey also
noted that RAI's $3.5 billion acquisition of Conwood, announced
this week, marks another important milestone in Reynolds American's
drive to further strengthen its position as a leader in the tobacco
industry. "Conwood has an impressive performance record. It is the
nation's second- largest manufacturer of moist snuff. It has the
No. 1 or No. 2 position in every smokeless category. And its brands
deliver superior margins," Ivey said. "Conwood has been the growth
leader in the moist snuff category, where it has built a 23 percent
share of market. And the moist snuff category itself has been
growing at an annual rate of 4 percent to 5 percent for the past
five years," she said. "So this acquisition provides us with an
important and significant platform that would have taken years to
build. We are excited by this unique opportunity to gain immediate
scale and strength in the growing moist snuff category." Brand
Performance Summing up R.J. Reynolds' brand performance for the
first quarter, Lynn J. Beasley, R.J. Reynolds' president and chief
operating officer, said, "Our key goal is to grow share on our two
investment brands, Camel and Kool, while we profitably manage the
remainder of our portfolio. And that's happening. By all measures,
we are doing well." Beasley said that during the quarter,
Information Resources, Inc. (IRI), the company that provides R.J.
Reynolds with retail share of market data, refined its methodology
to provide better information upon which to base comparisons. IRI
has restated the 2005 share performance of R.J. Reynolds brands
based on the new criteria, so 2006 performance can be compared with
2005. Based on those comparisons, the combined first-quarter share
of the company's investment brands was 10.29 points, up 0.78
percentage points from the first quarter of 2005. "Overall,
industry fundamentals are good," Beasley said. "We are, however,
seeing increased activity in the menthol category in the form of
free-product promotions. Nonetheless, Kool gained 0.21 share points
during the quarter, as it continued to benefit from the enhanced
retail presence and focus it receives as one of our two investment
brands." Beasley said that Camel also continued its growth
momentum, as well as its heritage of innovation with the
first-quarter introduction of Camel Wides tattoo packs. Camel also
initiated new efforts to enhance the performance of the brand's
menthol styles, including product and packaging upgrades, as well
as increases in marketing support and retail presence. These
efforts have already generated growth in Camel menthol's
distribution and share of market. The first-quarter share for
Camel's filtered styles was 7.20 percent, a 0.56 point increase
from the prior-year period. Later in the second quarter, Camel
plans to begin a test market of Camel Snus (pronounced "snoose"), a
smokeless, spitless tobacco product that will come in a small pouch
that is placed between the lip and gum. Camel Snus is different
from most moist snuff sold in the United States: its tobacco is
pasteurized, not fermented, and it contains less moisture and salt
than moist snuff. As a result, Camel Snus does not require the
consumer to spit, making it a convenient option for adult tobacco
consumers. Test markets will be conducted in Portland, Ore., and
Austin, Texas. "The test markets will provide an opportunity to
generate valuable learning regarding the potential business
opportunity for snus," Beasley said. "This test is consistent with
our desire to offer a variety of differentiated products to adult
tobacco consumers." Other Dynamics RAI's chief financial officer,
Dianne M. Neal, said that the company's first-quarter performance
"fully met all of our expectations." She noted that R.J. Reynolds'
first-quarter volume, which declined 1.6 percent, benefited from a
favorable comparison to the first quarter of 2005, which had weak
volume, due to retailers accumulating inventory in late 2004. Neal
said the company continues to expect R.J. Reynolds' full-year
volume to decline by about 5 percent in 2006. Neal also said that
the second quarter may be marked by increased volume due to trade
inventory adjustments associated with the upcoming implementation
of R.J. Reynolds' new SAP systems platform. She noted that any
inventory increases in the second quarter would likely be balanced
by corresponding decreases in the third quarter. Neal said that RAI
remains on track to reach its goal of achieving $600 million in
annualized merger synergies by the end of 2006. In addition, she
said, the company has already begun to make progress against its
goal of $325 million in new productivity gains over the next five
years. "Like 2005," Neal said, "we expect 2006 to be another
dynamic year of profitable growth -- and we're already off to a
solid start." FULL YEAR FORECAST Reynolds American has reaffirmed
its full-year 2006 forecast. The company continues to expect
reported EPS of $8.00 to $8.40. The reported EPS estimate includes
the after-tax effect of: - $125 million to $150 million in pre-tax
incremental merger-related synergies, which will be partially
offset by pre-tax merger-related costs of approximately $50
million. - $75 million to $100 million in pre-tax productivity
initiatives for the year, against a five-year plan to deliver
approximately $325 million in new productivity savings. - A $65
million net tax benefit in the first quarter resulting from the
favorable resolution of prior years' tax matters. The company
expects its year-end balance sheet to remain strong, with cash and
short-term investments of about $2.7 billion (which includes
merger- related cash costs of about $150 million), and year-end
debt of $1.6 billion. This forecast excludes any impact from the
Conwood acquisition, which was announced this week. 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
Thursday, April 27, 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: - the substantial and increasing regulation
and taxation of the tobacco industry; - various legal actions,
proceedings and claims relating to the sale, distribution,
manufacture, development, advertising, marketing and claimed health
effects of tobacco products that are pending or may be instituted
against RAI or its subsidiaries; - the substantial payment
obligations and limitations on the advertising and marketing of
cigarettes under the MSA and other state settlement agreements; -
the continuing decline in volume in the domestic cigarette
industry; - competition from other manufacturers, including any new
entrants in the marketplace; - increased promotional activities by
competitors and the growth of deep- discount cigarette brands; -
the success or failure of new product innovations and acquisitions;
- the responsiveness of both the trade and consumers to new
products, marketing strategies and promotional programs; - the
ability to realize the benefits and synergies arising from the
combination of RJR Tobacco and the U.S. cigarette and tobacco
business of B&W; - the ability to achieve efficiencies in
manufacturing and distribution operations without negatively
affecting sales; - the cost of tobacco leaf and other raw materials
and other commodities used in products, including future market
pricing of tobacco leaf which could adversely impact inventory
valuations; - the effect of market conditions on foreign currency
exchange rate risk, interest rate risk and the return on corporate
cash; - the effect of market conditions on the performance of
pension assets or any adverse effects of any new legislation or
regulations changing pension expense accounting or required pension
funding levels; - the rating of RAI's and RJR's securities; - any
restrictive covenants imposed under RAI's and RJR's debt
agreements; - the possibility of fire, violent weather and other
disasters that may adversely affect the manufacturing facilities; -
any adverse effects from the transition of the packaging operations
formerly conducted by RJR Packaging, LLC, a wholly owned subsidiary
of RJR Tobacco, to the buyers of RJR Packaging, LLC's businesses; -
any adverse effects arising out of the implementation of an SAP
enterprise business system in the third quarter of 2006; - the
potential existence of significant deficiencies or material
weaknesses in internal controls over financial reporting that may
be identified during the performance of testing required under
Section 404 of the Sarbanes-Oxley Act of 2002; and - the failure to
consummate the announced acquisition of Conwood, or to realize the
anticipated benefits and synergies arising from such acquisition,
if consummated. 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, Santa Fe Natural Tobacco Company, Inc.,
Lane Limited and R.J. Reynolds Global Products, Inc. R.J. Reynolds
Tobacco Company, the second- largest U.S. tobacco company,
manufactures about one of every three cigarettes sold in the
country. The company's brands include five of the 10 best-selling
U.S. brands: Camel, Kool, Winston, Salem and Doral. Santa Fe
Natural Tobacco Company, Inc. manufactures Natural American Spirit
cigarettes and other tobacco products for U.S. and international
markets. Lane Limited manufactures several roll-your-own, pipe
tobacco and little cigar brands, and distributes Dunhill tobacco
products. R.J. Reynolds Global Products, Inc. manufactures, sells
and distributes American-blend cigarettes and other tobacco
products to a variety of customers worldwide. Copies of RAI's news
releases, annual reports, SEC filings and other financial materials
are available at http://www.reynoldsamerican.com/. Schedule 1
REYNOLDS AMERICAN INC. CONDENSED CONSOLIDATED STATEMENTS OF
INCOME-GAAP (Dollars in Millions, Except Per Share Amounts)
(Unaudited) Quarter Ended March 31, 2006 2005 Net sales $1,815
$1,812 Net sales, related party 145 145 1,960 1,957 Cost of
products sold 1,165 1,111 Selling, general and administrative
expenses 342 364 Amortization expense 7 15 Operating income 446 467
Interest and debt expense 35 24 Interest income (36) (17) Other
expense, net - 4 Income from continuing operations before income
taxes 447 456 Provision for income taxes 167 175 Income from
continuing operations 280 281 Extraordinary item - gain on
acquisition (1) 65 - Net income $345 $281 Basic income per share:
Income from continuing operations $1.90 $1.91 Extraordinary item
(1) 0.44 - Net income $2.34 $1.91 Diluted income per share: Income
from continuing operations $1.90 $1.90 Extraordinary item (1) 0.44
- Net income $2.34 $1.90 Basic weighted average shares, in
thousands 147,477 147,384 Diluted weighted average shares, in
thousands 147,642 147,584 (1) Includes adjustments to the 2000
extraordinary gain on acquisition, resulting from favorable
resolution of prior-years' tax matters. Schedule 2 REYNOLDS
AMERICAN INC. Reconciliation of 2005 GAAP Results to 2006 GAAP
Results (Dollars in Millions) (Unaudited) First Quarter Operating
Net Income Income 2005 Results $467 $281 Deduct 2005 Phase II
growers' trust offset (65) (39) Add back 2005 federal tobacco
buyout assessment 3 2 Add back 2005 merger/integration costs 22 13
Federal tobacco buyout assessment 9 6 Merger/integration costs (7)
(5) Extraordinary gain on acquisition - 65 Operations and other 17
22 2006 Results $446 $345 CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions) (Unaudited) March 31, December 31, 2006 2005
Assets Cash and cash equivalents $1,705 $1,333 Short-term
investments 476 1,373 Other current assets 2,338 2,359 Trademarks,
net 2,185 2,188 Goodwill 5,672 5,672 Other noncurrent assets 1,551
1,594 $13,927 $14,519 Liabilities and shareholders' equity Tobacco
settlement and related accruals $1,909 $2,254 Current maturities of
long-term debt 190 190 Accrued liabilities and other current
liabilities 1,575 1,705 Long-term debt (less current maturities)
1,545 1,558 Long-term deferred income taxes 562 639 Long-term
retirement benefits 1,185 1,374 Other noncurrent liabilities 243
246 Shareholders' equity 6,718 6,553 $13,927 $14,519 Schedule 3
REYNOLDS AMERICAN INC. Reconciliation of GAAP to Adjusted Results
RAI management uses "adjusted" (non-GAAP) measurements to set
performance goals and to measure the performance of the overall
company, and believes that investors' understanding of the
underlying performance of the company's continuing operations is
enhanced through the disclosure of these metrics. "Adjusted"
(non-GAAP) results are not, and should not be viewed as,
substitutes for "reported" (GAAP) results. First Quarter: 2006 2005
Operating Net Diluted Operating Net Diluted Income Income EPS
Income Income EPS GAAP results $446 $345 $2.34 $467 $281 $1.90 The
GAAP results include the following expense (income): Federal
tobacco buyout assessment (9) (6) (0.04) 3 2 0.01 Phase II growers'
trust offset - - - (65) (39) (0.26) Merger/integration costs 7 5
0.03 22 13 0.09 Extraordinary gain on acquisition - (65) (0.44) - -
- Total adjustments (2) (66) (0.45) (40) (24) (0.16) Adjusted
results $444 $279 $1.89 $427 $257 $1.74 Schedule 4 R.J.REYNOLDS /
INDUSTRY QUARTERLY VOLUMES THREE MONTHS ENDING MARCH 31, (VOLUME IN
BILLION UNITS) CHANGE Q1 2006 Q1 2005 UNITS % CAMEL (Filter Styles)
5.4 4.9 0.5 10.1% KOOL 2.8 2.7 0.1 4.0% TOTAL INVESTMENT BRANDS 8.2
7.6 0.6 7.9% TOTAL SELECTIVE SUPPORT BRANDS 10.2 10.6 -0.4 -3.7%
TOTAL NON-SUPPORT BRANDS 6.2 6.8 -0.6 -8.7% TOTAL RJRT DOMESTIC
24.6 25.0 -0.4 -1.6% OTHER RAI COMPANIES 0.6 0.6 0.0 7.0% TOTAL RAI
25.2 25.5 -0.3 -1.4% TOTAL RJRT 24.6 25.0 -0.4 -1.6% TOTAL FP 15.0
15.0 0.0 0.2% TOTAL SAVINGS 9.6 10.0 -0.4 -4.2% FP/TOTAL MIX 61.0%
59.9% 1.1% INDUSTRY 88.5 87.9 0.5 0.6% FULL PRICE 63.6 62.7 0.9
1.5% SAVINGS 24.9 25.2 -0.4 -1.5% FP/TOTAL MIX 71.9% 71.3% 0.6%
Numbers may not add due to rounding Other RAI Companies include
U.S. volume for Santa Fe Natural Tobacco Co. and Lane Limited, as
well as volume for Puerto Rico and other U.S. territories. Schedule
5 R.J.REYNOLDS - QUARTERLY RETAIL SHARE OF MARKET THREE MONTHS
ENDING MARCH 31, Q1 2006 Q1 2005 CHANGE CAMEL (Filter Styles) 7.20
6.64 0.56 KOOL 3.09 2.87 0.21 TOTAL INVESTMENT BRANDS 10.29 9.51
0.78 TOTAL SELECTIVE SUPPORT BRANDS 12.05 12.86 -0.81 TOTAL
NON-SUPPORT BRANDS 7.61 8.25 -0.64 TOTAL RJRT DOMESTIC 29.95 30.62
-0.67 Numbers may not add due to rounding Retail shares of market
are as reported by Information Resources Inc. DATASOURCE: Reynolds
American Inc. CONTACT: Investor Relations, Ken Whitehurst,
+1-336-741-0951, or Media, Seth Moskowitz, +1-336-741-7698, both of
Reynolds American Inc. Web site: http://www.reynoldsamerican.com/
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