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Reynolds American in 1Q16: How Did Newport Help?

Penny Morgan

Reynolds American's Update on Developing Broad Brand Strategies

(Continued from Prior Part)

Segment overview

Reynolds American (RAI) operates in four business segments:

  1. RJR Tobacco

  2. Santa Fe

  3. American Snuff Co. (Conwood)

  4. Others

Revenue and operating income

To begin with, RJR Tobacco’s net revenue increased by 49.9% to $2.4 billion in 1Q16 compared to $1.6 billion in 1Q15. The increase was primarily due to a strong performance by its powerful key brands benefiting from the Newport brand’s incorporation into the company’s cigarette portfolio.

RJR Tobacco’s operating income increased by 88.3% to $1.1 billion in 1Q16 compared to $0.6 billion in 1Q15. The increase was primarily due higher cigarette pricing and the addition of Newport brand. Adjusted operating income increased by 73.8% to $1.1 billion. The adjusted results exclude charges for the Engle progeny lawsuits and implementation costs.

Retail market share

The Newport Menthol brand delivered strong 1Q16 results. The brand’s retail market share increased by 0.6% to 14% in 1Q16 compared to 1Q15. The increase was primarily due to improved presence in retail stores and increased engagement with adult tobacco consumers. RJR Tobacco’s total retail (XRT) market share was in line with the prior year’s quarter at 32.5% in 1Q16.

RJR Tobacco’s 4Q15 retail market share was reflected on a pro forma basis for the company’s new brand portfolio following the Lorillard acquisition and the divestiture to Imperial Tobacco (ITYBY). Camel and Pall Mall brands’ retail market share decreased in 1Q16 from 1Q15. However, the combined retail market share of Newport, Camel, and Pall Mall increased to 30.0%. These brands comprise up to 93% of RJR’s total cigarette retail market share.

International rights

RJR Tobacco primarily conducts business in the United States. However, in 1999, the international rights to RJR’s Tobacco’s brands were sold to Japan Tobacco (JAPAF) (JAPAY). RJR Tobacco also manages super-premium cigarette brands Dunhill and State Express 555, which are licensed from British American Tobacco (BTI).

In the highly competitive tobacco industry, like Philip Morris (PM), Reynolds American is also producing innovative products and expanding into smoke-free tobacco.

Reynolds American (RAI) makes 0.4% of the iShares Core US Growth ETF (IUSG).

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