Reynolds American Reports Strong Second Quarter Results for RJR
WINSTON-SALEM, N.C., Aug. 2 /PRNewswire-FirstCall/ -- Reynolds
American Inc. (NYSE:RAI) today reported strong second-quarter
financial results for R.J. Reynolds Tobacco Holdings, Inc. (RJR), a
publicly traded company until July 30, and now a wholly owned
subsidiary of RAI. Reynolds American was established as a publicly
traded holding company following a combination of the nation's No.
2 and No. 3 cigarette manufacturers, R.J. Reynolds Tobacco Company
(RJRT) and the U.S. business of Brown & Williamson Tobacco
Corp. (B&W). RJR's solid second-quarter performance reflects
continued improvements resulting from fundamental changes in the
company's strategies and cost structure announced in September
2003. GAAP RJR Second Quarter and First Half 2004 Results -
Highlights (dollars in millions, except per-share amounts) Second
Quarter First Half % % 2004(1) 2003(2) Change 2004(1) 2003(2)
Change Net sales $1,352 $1,431 -5.5% $2,570 $2,649 -3.0% Operating
income $266 $140 90.0% $487 $275 77.1% Net income $151 $70 115.7%
$273 $141 93.6% Net income per diluted share $1.77 $0.83 113.3%
$3.20 $1.67 91.6% 1. 2004 operating results include the net benefit
of first- and second- quarter adjustments to previously recorded
restructuring charges of $9 million in each quarter, and a $33
million first-quarter charge related to the settlement of the
tobacco growers' lawsuit. 2. Second-quarter and first-half 2003
reported results include a restructuring charge of $55 million ($34
million after tax), as well as a $54 million benefit ($33 million
after tax) from a change in RJR Tobacco's returned-goods policy.
Balance Sheet Highlights (as of June 30, 2004) Cash and short- term
investments: $1.2 billion Debt: $1.6 billion Equity: $3.2 billion
Dividend: $0.95 per share quarterly; $3.80 per share annualized
Discussion of Second Quarter and First Half 2004 Results "Our
second-quarter results demonstrate our success over the past year
in strengthening our business and positioning the company for
future growth," said Andrew J. Schindler, executive chairman of
Reynolds American. "We've made significant progress with our
marketplace strategy, streamlining our cost structure, improving
profitability, and planning an efficient and effective integration
of B&W and RJRT. "We are meeting all of our major restructuring
milestones, and are well on our way to achieving our goal of $1
billion in cost savings by the end of 2005," Schindler said. "In
addition, we are confident that we will achieve $550 million to
$600 million in merger-related synergies within approximately two
years." Second Quarter Financial Results RJR's second-quarter net
sales were $1.4 billion, a 5.5 percent decrease as the effects of
lower volume were partially offset by an improved full-price to
savings-brand mix. Also, RJR's second-quarter 2003 results
benefited from the $54 million favorable impact of a change in
RJRT's returned-goods policy. Operating income of $266 million was
up 90.0 percent from the prior-year quarter primarily as a result
of cost-savings initiatives. In addition, operating income reflects
an improved full-price mix and lower restructuring charges.
Second-quarter 2004 operating results benefited from a net
restructuring charge adjustment of $9 million. The company recorded
a $55 million restructuring charge in the second quarter of 2003.
Second-quarter net income was $151 million, up $81 million, or
115.7 percent, from the year-ago quarter due to the factors
discussed above. Earnings per diluted share were $1.77, compared
with $0.83 in the second quarter of 2003. Six Month Financial
Results For the first six months of 2004, net sales were $2.6
billion, down 3 percent compared with the first half of 2003. A
volume decline and the 2003 returned-goods adjustment referenced
above were partially offset by an improved full-price mix and lower
marketplace spending. First-half operating income was $487 million,
up 77.1 percent from the year-ago period primarily due to
cost-savings initiatives, an improved full- price mix and
first-half net restructuring charge adjustments totaling $18
million. Net income of $273 million was up 93.6 percent from the
first six months of 2003. Earnings per diluted share were $3.20,
compared with $1.67 in the prior-year period. Volume and Product
Mix During Second Quarter Shipment Volume The following table
summarizes second-quarter and first-half 2004 U.S. cigarette
shipment volume for RJR's operating companies, in billions of
units: For the Three Months For the Six Months Ended June 30 Ended
June 30 % % 2004 2003 Change(1) 2004 2003 Change(1) RJR Tobacco
volume 19.7 21.0 -6.0% 37.6 40.1 -6.2% Full-price 12.9 13.0 -1.5%
24.5 24.4 0.2% Savings 6.8 8.0 -13.6% 13.1 15.7 -16.2% SFNTC volume
(2) 0.3 0.3 7.1% 0.6 0.6 7.2% Total domestic volume (3) 20.0 21.3
-5.9% 38.2 40.7 -6.0% 1. Percentages are calculated from unrounded
volume numbers. 2. The 7.1% increase in SFNTC volume is based on
actual volume of 320 million units in the second quarter of 2004
(599 million units for first-half 2004), compared with 299 million
units during the second quarter of 2003 (559 million units for
first-half 2003). This does not include international volume of 172
million units in the second quarter of 2004 (319 million units in
first half) and 161 million units in the second quarter of 2003
(296 million units in first half). 3. This does not include Puerto
Rico cigarette volume of 253 million units in the second quarter of
2004 (533 million units for first-half 2004), compared with 250
million units during the second quarter of 2003 (545 million units
in first half). RJRT Second Quarter Volume and Mix Total RJRT
volume was down 6.0 percent compared with the second quarter of
2003, driven by a 13.6 percent decline in savings volume. RJR
Tobacco's full- price volume was down slightly (1.5 percent) from
the prior-year quarter. Camel, RJR Tobacco's largest brand, posted
a 9.8 percent increase in its filtered styles. RJR Tobacco's
second-quarter mix of full-price to savings brands was 65.2
percent, up 3 percentage points from 62.2 percent in the second
quarter of 2003. RJRT First Half Volume and Mix RJRT's total volume
in the first half of 2004 was 6.2 percent lower than the first half
of 2003, driven by a 16.2 percent decline in savings volume.
Full-price volume for the first half was stable (up 0.2 percent).
RJR Tobacco's two full-price growth brands, Camel and Salem,
performed well in the first half. Camel's filtered styles gained
9.5 percent. Salem was down slightly (1.7 percent) compared with a
particularly strong first-half 2003, during which the brand's
repositioning was launched. RJR Tobacco's first-half full-price mix
was 65.1 percent, up 4.2 percentage points from 60.9 percent in the
prior-year period. Industry Volume and Mix Based on information
from Management Science Associates, Inc. (MSAi), total industry
volume for the second quarter of 2004 was 102.3 billion units, down
1.3 percent from the year-ago quarter. First-half industry volume
was 194.2 billion units, down 2.4 percent. These numbers reflect a
new methodology that MSAi has adopted to better estimate the size
of deep-discount brands produced by smaller manufacturers.
Consistent with RJR's earlier estimates, the new MSAi data indicate
that these savings brands currently represent just under 15 percent
of total industry volume. Based on these new volume estimates, the
industry's full-price to savings- brand mix was 69.7 percent for
the second quarter and 69.6 percent for the first half of 2004. On
a comparable basis, industry full-price mix was 68.6 for the second
quarter and 68.2 for the first half of 2003. Brand Performance RJR
Tobacco's total share of U.S. cigarette sales in the second quarter
was 21.58 percent, down 1.19 percentage points from the second
quarter of 2003. The company's first-half share was 21.56 percent,
down 1.29 points from the prior-year period. Camel and Salem, RJR
Tobacco's growth brands, both delivered share gains during the
second quarter and the first half of 2004, compared with prior-year
periods. Camel's filtered styles' strong second-quarter share of
6.26, a gain of 0.30 share points from the prior-year quarter,
demonstrates the brand's compelling equity and potential in the
marketplace. Salem has grown 0.29 share points since the brand's
re-launch in early 2003, with a 2.58 share in the second quarter of
2004, a gain of 0.04 over the prior-year quarter. Winston and
Doral, which became limited-investment brands in September 2003,
are both down from the year-ago quarter. Santa Fe's Natural
American Spirit brand has performed well, posting volume and share
gains for both the second quarter and the first half, compared with
year-ago periods. Reynolds American Outlook "I am very optimistic
about the future of Reynolds American Inc. and its operating
companies," said Susan Ivey, president and CEO of Reynolds
American. "Our new company is financially and operationally
stronger, our operating companies are well-positioned to compete
effectively in the marketplace, and we have a great group of
employees who are focused on performance and delivering results. I
have every confidence that we will be in a position to provide an
attractive return to our shareholders going forward." Reynolds
American's chief financial officer, Dianne M. Neal, added: "Since
the merger just closed on July 30, there is still considerable work
to be done before we're in a position to issue full-year Reynolds
American guidance. We would, however, like to provide some
preliminary information. "First," Neal said, "on a stand-alone
basis, RJR would have generated $875-to-$925 million in operating
income this year. This includes approximately $20 million of
expense for the settlement of the tobacco growers' lawsuit, net of
restructuring-charge adjustments. The increase in earnings compared
to RJR's prior guidance reflects accelerated cost savings of
$500-to-$550 million this year, bringing the 2003 and 2004
cumulative cost savings to $900-to-$950 million." In addition, Neal
said: * Brown & Williamson's and Lane's operations for the
remainder of the year will contribute operating income of $175
million to $200 million. * Merger-related synergies in 2004 should
total $50 million to $100 million, with a projected total of $550
million to $600 million within approximately two years. * RAI
expects to incur non-recurring cash costs associated with the
merger of $250 million to $350 million in 2004. Some of these costs
will impact RAI's operating income. Total non-recurring cash costs
are estimated at $700 million to $800 million through 2006. "It
will take us some time to work through the accounting treatment for
the various components of the merger and adjust our projections
associated with the timing, amount and financial-statement impact
of synergies and non- recurring costs," Neal said. "All of these
elements will impact RAI's 2004 operating income, earnings and cash
flow. We expect to complete our analysis and provide RAI's 2004
earnings guidance no later than mid-September." Conference Call
Webcast Today Reynolds American will webcast a conference call to
discuss second-quarter financial results at 9:30 a.m. Eastern
Daylight Time on Monday, Aug. 2. 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 seven 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. Cautionary Information Regarding Forward-Looking
Statements 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 include risks and
uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. These risks
include the substantial and increasing regulation and taxation of
the cigarette industry; various legal actions, proceedings and
claims relating to the sale, distribution, manufacture,
development, advertising, marketing and claimed health effects of
cigarettes 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 various
litigation settlement agreements; the continuing decline in volume
in the domestic cigarette industry; competition from other
cigarette manufacturers, including increased promotional activities
and the growth of deep-discount brands; the success or failure of
new product innovations and acquisitions; the responsiveness of
both the trade and consumers to new products and marketing 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; any potential costs or
savings associated with realigning the cost structure of RAI and
its subsidiaries; the ability to achieve efficiencies in
manufacturing and distribution operations without negatively
affecting sales; the cost of tobacco leaf and other raw materials
and commodities used in products; the effect of market conditions
on the performance of pension assets and the return on corporate
cash; and the ratings of RAI securities. Due to these uncertainties
and risks, undue reliance should not be placed 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. Reynolds American Inc. 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 United
States, including five of the nation's 10 best-selling brands:
Camel, Winston, KOOL, Salem and Doral. Santa Fe Natural Tobacco
Company, Inc. manufactures Natural American Spirit cigarettes and
other tobacco products, and markets them both nationally and
internationally. 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 on the company's Web site,
http://www.reynoldsamerican.com/ . (financial tables follow) R.J.
REYNOLDS TOBACCO HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS
OF INCOME-GAAP (Dollars in Millions, Except Per Share Amounts)
(Unaudited) Three Months Ended Six Months Ended June 30, June 30,
2004 2003 2004 2003 Net sales (1) $ 1,352 $ 1,431 $ 2,570 $ 2,649
Cost of products sold 797 855 1,508 1,604 Selling, general and
administrative expenses 298 381 593 715 Restructuring and asset
impairment charges (2) (9) 55 (18) 55 Operating income 266 140 487
275 Interest and debt expense 21 29 41 65 Interest income (4) (7)
(9) (17) Other (income) expense, net - 1 5 (6) Income from
continuing operations before income taxes 249 117 450 233 Provision
for income taxes 99 47 178 92 Income from continuing operations 150
70 272 141 Gain on sale of discontinued businesses, net of income
taxes (3) 1 - 1 - Net income $151 $70 $273 $141 Basic income per
share: Income from continuing operations $1.78 $0.84 $3.22 $1.68
Gain on sale of discontinued businesses (3) 0.01 - 0.01 - Net
income $1.79 $0.84 $3.23 $1.68 Diluted income per share: Income
from continuing operations $1.76 $0.83 $3.19 $1.67 Gain on sale of
discontinued businesses (3) 0.01 - 0.01 - Net income $1.77 $0.83
$3.20 $1.67 Basic weighted average shares, in thousands 84,486
83,479 84,380 83,755 Diluted weighted average shares, in thousands
85,347 83,986 85,292 84,469 (1) Net sales in the second quarter of
2003 benefited from a $54 million adjustment related to revised
sales programs. (2) Includes fixed asset impairment, contract
termination costs and related charges. (3) The 1999 gain on the
sale of the international tobacco business was adjusted as a result
of a favorable resolution of prior-year tax matters. Reconciliation
of 2003 Results to 2004 Results (Dollars in Millions) (Unaudited)
Second Quarter First Half Operating Net Operating Net Income Income
Income Income 2003 Results $140 $70 $275 $141 Addback 2003
restructuring & impairment charges 55 34 55 34 2004 net
restructuring & impairment reversals 9 5 18 11 Tobacco growers'
lawsuit - - (33) (20) Gain on sale of discontinued businesses - 1 -
1 Operations improvement 62 41 172 106 2004 Results $266 $151 $487
$273 R.J. REYNOLDS TOBACCO HOLDINGS, INC. CONDENSED CONSOLIDATED
BALANCE SHEETS (Dollars in Millions) June 30, December 31, 2004
2003 Assets Cash and cash equivalents $1,048 $1,523 Short-term
investments 108 107 Other current assets 1,618 1,701 Trademarks,
net 1,759 1,759 Goodwill 3,288 3,292 Other noncurrent assets 1,235
1,295 $9,056 $9,677 Liabilities and stockholders' equity Tobacco
settlement and related accruals $1,117 $1,629 Current maturities of
long-term debt 3 56 Accrued liabilities and other 988 1,180
Long-term debt (less current maturities) 1,634 1,671 Deferred
income taxes 777 806 Long-term retirement benefits 1,103 1,034
Other noncurrent liabilities 249 244 Stockholders' equity 3,185
3,057 $9,056 $9,677 DATASOURCE: Reynolds American Inc. CONTACT:
Investor Relations, Carole Biermann When, +1-336-741-5182, or
Media, Seth Moskowitz, +1-336-741-7698, both of Reynolds American
Inc. Web site: http://www.rjrt.com/
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